EE-RM-93-801 COMMENT OR12
For:

Edison Electric Institute

701 Pennsylvania Avenue,

Washington, 20004

By:

Energy Research Group, Inc.

400 Fifth Avenue

Waltham, 02154

JULY 1

EE-RM-93-801 COMMENT OR12

For: 

Edison Electric Institute 

701 Pennsylvania Avenue, NW 

Washington, DC 20004 

By: 

Energy Research Group, Inc. 

400 Fifth Avenue 

Waltham, MA 02154 

JULY 1992 
LIST OF TESTIMONY SUMMARIES

A. James Barnes

Massachusetts Department of Public Utilities

Docket No. D.P.U. 91-131 ........................................ 1

Stephen S. Bernow

Wisconsin Public Service Commission, Docket No. 05-EP-6 ................ 5

Shepard C. Buchanan

Wisconsin Public Service Commission, Docket No. 05-EP-6 ............... 11

Emily J. Caverhill

Illinois Commerce Commission, ICC Docket No. 91-0050 ................ 15

Marc W. Goldsmith

Illinois Commerce Commission, ICC Docket No. 91-0050 ........ ........ 18

Alfred E. Kahn

Florida Public Service Commission, Docket No. 910883-EI ............... 22

Robert H. Koppe

Massachusetts Department of Public Utilities

Docket No. D.P.U. 91-131 ....................................... 25

Lester B. Lave

Massachusetts Department of Public Utilities

Docket No. D.P.U. 91-131 ....................................... 28

Richard K. Lester

Massachusetts Department of Public Utilities

Docket No. D.P.U. 91-131 ....................................... 32

Karl J. Nalepa

Public Utility Commission of Texas, Docket No. 10400 .................. 38

William D. Nordhaus

Massachusetts Department of Public Utilities

Docket No. D.P.U. 91-131 ........................................ 41

EE-RM-93-801 COMMENT OR12

LIST OF TESTIMONY SUMMARIES 

A. James Barnes 

Massachusetts Department of Public Utilities 

Docket No. D.P.U. 91-131 ........................................ 1 

Stephen S. Bernow 

Wisconsin Public Service Commission, Docket No. 05-EP-6 ................ 5 

Shepard C. Buchanan 

Wisconsin Public Service Commission, Docket No. 05-EP-6 ............... 11 

Emily J. Caverhill 

Illinois Commerce Commission, ICC Docket No. 91-0050 ................ 15 

Marc W. Goldsmith 

Illinois Commerce Commission, ICC Docket No. 91-00,50 ................ 18 

Alfred E. Kahn 

Florida Public Service Commission, Docket No. 910883-EI ............... 22 

Robert H. Koppe 

Massachusetts Department of Public Utilities 

Docket No. D.P.U. 91-131 .......... ' ............................. 25 

Lester B. Lave 

Massachusetts Department of Public Utilities 

Docket No. D.P.U. 91-131 ....................................... 28 

Richard K. Lester 

Massachusetts Department of Public Utilities 

Docket No. D.P.U. 91-131 ....................................... 32 

Karl J. Nalepa 

Public Utility Commission of Texas, Docket No. 10400 ., ................ 38 

William D. N ordhaus 

Massachusetts Department of Public Utilities 

Docket No. D.P.U. 91-131 . ' ...................................... 41 
LIST OF TESTIMONY SUMMARIES

(Continued)

Robert D. Rowe

Massachusetts Department of Public Utilities

Docket No. D.P.U. 91-131 ....................................... 44

Larry E. Ruff

Delaware Public Service Commission, Docket No. 29 ................... 52

Gayatri M. Schilberg & William B. Marcus

California Energy Commission, Docket No. 88-ER-8 .................... 55

Richard L. Schmalensee

Massachusetts Department of Public Utilities

Docket No. D.P.U. 91-131 ....................................... 59

Southern California Edison Company

California Energy Commission, Docket No. 90-ER-92 ................... 64

William L. Stillinger

Massachusetts Department of Public Utilities

Docket No. D.P.U. 91-131 ....................................... 70

U.S. Department of Energy

Texas Public Service Commission, Project No. 10780 ... ................ 73

EE-RM-93-801 COMMENT OR12

Robert D. Rowe 

LIST OF TESTIMONY SUMMARIES 

(Continued) 

Massachusetts Department of Public Utilities 

Docket No. D.P.U. 91-131 ....................................... 44 

Larry E. Ruff 

Delaware Public Service Commission, Docket No. 29 ................... 52 

Gayatri M. Schilberg & William B. Marcus 

California Energy Commission, Docket No. 88-ER-8 .................... 55 

Richard L. Schmalensee 

Massachusetts Department of Public Utilities 

Docket No. D.P.U. 91-131 ....................................... 59 

Southern California Edison Company 

California Energy Commission, Docket No. 90-ER-92 ................... 64 

William L. Stillinger 

Massachusetts Department of Public Utilities 

Docket No. D.P.U. 91-131 ....................................... 70 

U.S. Department of Energy 

Texas Public Service Commission, Project No. 10780 ................... 73 
A. JAMES BARNES

School of Public and Environmental Affairs

SPEA Room 300

Indiana University

Bloomington, Indiana 47405

PROFILE

Mr. Barnes is Dean of the School of Public and Environmental Affairs and Professor of

Public Environmental Affairs at Indiana University. He also serves as Special Counsel to

the Washington, D.C. law firm of Beveridge & Diamond. A graduate of Harvard Law

School, Mr. Barnes held senior positions in the U.S. Environmental Protection Agency

(EPA) including Deputy Administrator, General Counsel and Chief of Staff. From 1970 to

1973, he participated in the establishment of the EPA as an assistant to the first

Administrator.

TESTIMONY REFERENCED

"Testimony of A. James Barnes on Behalf of Massachusetts Electric Company, Western

Massachusetts Electric Company and Boston Edison Company in the Investigation by the

Department on its Own Motion as to the Environmental Externality Values to be Used in

Resource Cost-Effectiveness Tests by Electric Companies Subject to the Department's

Jurisdiction," Massachusetts Department of Public Utilities Docket No. D.P.U. 91-131,

October 4, 1991.

STATE REGULATORY ISSUE ADDRESSED

The Massachusetts Department of Public Utilities (D.P.U.) is re-examining the monetized

environmental externality values for eight air pollutants (CO2, CH4, CO, N2O, NON, SO2,

TSPs and VOCs) that are to be incorporated into the electric utility IRM process under its

Order on Integrated Resource Management (D.P.U. Order 89-239).

SUMMARY OF CONCLUSIONS

Mr. Barnes states that the specific assumption concerning the development of environmental

regulations used by the Tellus Institute in deriving the environmental externality costs

adopted by the Massachusetts D.P.U. is wrong. He concludes that the, highest cost of

control methodology used by Tellus does not reveal the value that environmental regulators

place on reducing residual emissions. This theory "is patently inconsistent with the history

and practice of environmental regulation in the United States" [p. 34]. Furthermore, D.P.U.

1

EE-RM-93-801 COMMENT OR12

PROFILE 

A. JAMES BARNES 

School of Public and Environmental Affairs 

SPEA Room 300 

Indiana University 

Bloomington, Indiana 47405 

Mr. Barnes is Dean of the School of Public and Environmental Affairs and Professor of 

Public Environmental Affairs at Indiana University. He also serves as Special Counsel to 

the Washington, D.C. law firm of Beveridge & Diamond. A graduate of Harvard Law 

School, Mr. Barnes held senior positions in the U.S. Environmental Protection Agency 

(EPA) including Deputy Administrator, General Counsel and Chief of Staff. From 1970 to 

1973, he participated in the establishment of the EPA as an assistant to the first 

Administrator. 

TESTIMONY REFERENCED 

IITestimony of A. James Barnes on Behalf of Massa'chusetts Electric Company, Western 

Massachusetts Electric Company and Boston Edison Company in the Investigation by the 

Department on its Own Motion as to the Environmental Externality Values to be Used in 

Resource Cost-Effectiveness Tests by Electric Companies Subject to the Department's 

Jurisdiction,1I Massachusetts Department of Public Utilities Docket No; D.P.U. 91-131, 

October 4, 1991. ' 

STATE REGULATORY ISSUE ADDRESSED 

The Massachusetts Department of Public Utilities (D.P.U.) is re-examining the monetized 

environmental externality values for eight air pollutants (C02, CH4, CO, N20, NOx, S02' 

TSPs and VOCs) that are to be incorporated into the electric utility IRM process under its 

Order on Integrated Resource Management (D.P.U. Order 89-239). 

SUMMARY OF CONCLUSIONS 

Mr. Barnes states that the specific assumption concerning the development of environmental 

regulations used by the Tellus Institute in deriving the environmental externality costs 

adopted by the Massachusetts D.P.U. is wrong. He concludes that the highest cost of 

control methodology used by Tellus does not reveal the value that environmental regulators 

place on reducing residual emissions. This theory lIis patently inconsistent with the history 

and practice of environmental regulation in the United States" [po 34]. Furthermore, D.P.U. 

1 
regulations governing externalities must be compatible with federal environmental

regulations.

ISSUES

The following issues concerning environmental externalities were raised in the direct

testimony of Professor Barnes. Page citations directly follow all direct quotations from this

testimony.

Environmental Externality Policy Options

"The predominate approach to environmental regulation in this country is command and

control" [p.4]. However, the regulations reflect a number of requirements (e.g., desired

ambient conditions, technology-based or technology-forcing requirements), a number of

distinctions (e.g., existing versus new sources, categories of sources and geographic

differences) and a series of political decisions. Consequently, there is "great variability in the

extent to which individual sources are controlled and in the costs entailed in meeting the

limitation to which they are subject" [p.5].

There are two major federal laws that impose significant environmental requirements on

electric generating facilities.

Clean Air Act, enacted in 1970 and amended in 1977 and 1990, provides a comprehensive

approach to ambient air quality. The key elements of the federal legislation are

summarized.

National ambient air quality standards (NAAQS) are designed to protect the public

health and welfare at levels that provide a margin of safety for the most sensitive

members of society. "Cost and other economic factors are excluded; only the impacts

on public health can be considered" [pp. 8-9].

State implementation plans (SIPs) must be developed by each state to assure that

NAAQS are met. "The SIP process virtually ensures that the marginal costs of

meeting the ambient air quality standards will vary for the same type of facilities in

different areas of the country or state, as well as for the same kinds of emissions from

different types of facilities in the same area" [p. 11].

® New source performance standards (NSPS), the technology-based requirements that

industry must meet for major new or modified stationary sources are set by the EPA

and imposed by states through permits. Although "different facilities within a given

source category have to meet the same emission standards" [p.14], the cost per ton

of pollutant emission reduced varies according to facility-specific differences, such as

size or processes.

2

EE-RM-93-801 COMMENT OR12

regulations governing externalities must be compatible with federal environmental 

regulations. 

KEY ISSUES 

The following issues concerning environmental externalities were raised in the direct 

testimony of Professor Barnes. Page citations directly follow all direct quotations from this 

testimony. 

Environmental Externality Policy Options 

"The predominate approach to environmental regulation in this country is command and 

control" [pA]. However, the regulations reflect a number of requirements (e.g., desired 

ambient conditions, technology-based or technology-forcing requirements), a number of 

distinctions (e.g., existing versus new sources, categories of sources and geographic 

differences) and a series of political decisions. Consequently, there is "great variability in the 

extent to which individuai sources are controlled and in the costs entailed in meeting the 

limitation to which they are subject" [p.5]. 

There are two major federal laws that impose significant environmental requirements on 

electric generating facilities. 

Clean Air Act, enacted in 1970 and amended in 1977 and 1990, provides a comprehensive 

approach to ambient air quality. The key elements of the federal legislation are 

summarized. 

• National ambient air quality standards (NAAQS) are designed to protect the public 

health and welfare at levels that provide a margin of safety for the most sensitive 

members of society. "Cost and other economic factors are excluded; only the impacts 

on public health can be considered" [pp. 8-9]. 

• State implementation plans (SIPs) must be developed by each state to assure that 

NAAQS are met. "The SIP process virtually ensures that the marginal costs of 

meeting the ambient air quality standards will vary for the same type of facilities in 

different areas of the country or state, as well as for the same kinds of emissions from 

different types of facilities in the same area" [po 11]. 

• New source performance standards (NSPS), the technology-based requirements that 

industry must meet for major new or modified stationary sources are set by the EPA 

and imposed by states through permits. Although "different facilities within a given 

source category have to meet the same emission standards" [p.14], the cost per ton 

of pollutant emission reduced varies according to facility-specific differences, such as 

size or processes. 

2 
National eission standards for hazardous air pollutants (NESHAPs) emitted by

stationary sources of certain toxins are based on maximum available control

technology requirements (MACT). Compliance costs, on a per unit of pollutant

reduced, may well vary between facilities in the same or in a different industry.

In non-attainment areas, a major new or modified source of air pollutant emissions

must "cover the projected increase in emissions by either (1) reducing its own

allowable emissions of the pollutant in question from some other point(s) in facilities

it owns in the area or (2) purchasing allowable emission rights from some other

source in the area" [p. 19]. The required offset can be acquired at the lowest

available cost, the overall allowable emissions to the atmosphere do not increase and

the cost of obtaining the offset is internalized" [p. 20].

In addition, the major new or modified source must limit its emissions to the Lowest

Achievable Emission Rate (LAER). These limits "and concomitant costs for each

unit of emission reduction are likely to be quite different between different source

categories" [p. 21]. Existing sources in non-attainment areas generally must install

reasonable available control technology (RACT). Although similar emission limits

are imposed by state regulators on similar sources, "differences between individual

sources in a given category may produce different costs of control at the margin" [p.

21].

Acid rain control, as addressed in the amendments of 1990, sets a national emissions

cap for sulfur dioxide (SO2) emissions to be achieved and creates a system of

marketable allowances. In so doing, "Congress has assured that the environmental

costs associated with the emission of SO2 from new electric generating facilities will

be fully internalized" [p. 23].

Clean Water Act contains two sets of provisions that apply to electricity generation.

State water quality standards, which are state developed/federally approved, specify

ambient quality levels that must be maintained in various water bodies to protect

public health and environmental values.

Effluent limitation guidelines and new source performance standards for water

discharges from steam electric power plants are technology-based standards. Existing

facilities must use best available technology (BAT) economically achievable to comply

with effluent limitations, while modified or new facilities must meet "a standard for

control of the discharge of pollutants which reflects the greatest degree of effluent

reduction" [p. 27]. The emission limits and resulting cost of control under these two

standards "are different for existing and new plants in the same subcategory" [pp.

27-28].

As illustrated, "Congress has enacted regulatory schemes that ultimately require some

sources to control more than others, or to incur different costs of control, without regard to

the damage caused by emissions or whether other sources could control more cheaply" [p.

3

EE-RM-93-801 COMMENT OR12

National emission standards for hazardous air pollutants (NESHAPs) emitted by 

stationary sources of certain toxins are based on maximum available control 

technology requirements (MACf). Compliance costs, on a per unit of pollutant 

reduced, may well vary between facilities in the same or in a different industry. 

In non-attainment areas, a major new or modified source of air pollutant emissions 

must "cover the projected increase in emissions by either (1) reducing its own 

allowable emissions of the pollutant in question from some other p oint ( s) in facilities 

it owns in the area or (2) purchasing allowable emission rights from some other 

source in the area" [po 19]. The required offset can be acquired at the lowest 

available cost, lithe overall allowable emissions to the atmosphere do not increase and 

the cost of obtaining the offset is internalized" [po 20]. 

In addition, the major new or modified source must limit its emissions to the Lowest 

Achievable Emission Rate (LAER). These limits "and concomitant costs for each 

unit of emission reduction are likely to be quite different between different source 

categories II [po 21]. Existing sources in non-attainment areas generally must install 

reasonable available control technology (RACf). Although similar emission limits 

are imposed by state regulators on similar sources, "differences between individual 

sources in a given category may produce different costs of control at the margin" [po 

21]. 

e Acid rain control, as addressed in the amendments of 1990, sets a national emissions 

cap for sulfur dioxide (S02) emissions to be achieved and creates a system of 

marketable allowances. In so doing, "Congress has assured that the environmental 

costs associated with the emission of S02 from new electric generating facilities will 

be fully internalized" [po 23]. 

Clean Water Act contains two sets of provisions that apply to electricity generation. 

e State water quality standards, which are state developed/federally approved, specify 

ambient quality levels that must be maintained in various water bodies to protect 

public health and environmental values. 

e Emuent limitation guidelines and new source performance standards for water 

discharges from stearn electric power plants are technology-based standards. Existing 

facilities must use best available technology (BAT) economically achievable to comply 

with effluent limitations, while modified or new facilities must meet "a standard for 

control of the discharge of pollutants which reflects the greatest degree of effluent 

reduction" [po 27]. The emission limits and resulting cost of control under these two 

standards "are different for existing and new plants in the same subcategory" [pp. 

27-28]. 

As illustrated, "Congress has enacted regulatory schemes that ultimately require some 

sources to control more than others, or to incur different costs of control, without regard to 

the damage caused by emissions or whether other sources could control more cheaply" [po 

3 
34]. Clearly "it is not reasonable to conclude that in establishing emission limitations, regulators

have forgotten to price the residual emissions" [p. 31].

Environmental Externality Valuation Approaches

"The real regulatory world does not resemble the one hypothesized by Tellus as the basis for

its `revealed preference' approach to valuing residual emissions" [p. 30].

"If any `preference' regarding residual emissions is `revealed' by the current scheme of

environmental regulation it is that relatively little -- if any -- value should be placed on residual

emissions because regulators generally believe they have limited emissions to the extent

necessary to protect health and the environment" [pp. 5-6].

"Regulators simply do not as a general matter equate the cost of controlling emissions from any

particular source with the marginal benefit to society of reducing those emissions... With a few

exceptions economic efficiency is not central to the design of the environmental regulatory

requirements. As a consequence, the total cost of meeting environmental requirements is higher

than it needs to be" [p.5].

"It is not reasonable to conclude that in establishing emission limitations, regulators have

forgotten to price the residual emissions" [p. 31].

"Congress and the Executive Branch are now enthusiastically seeking to utilize market

mechanisms to achieve environmental objectives in the most cost-effective way possible" [pp.

30-31]. An example of this approach is the SO2 allowance trading system established under the

1990 amendments to the Clean Air Act.

Zero Externality Values

"Where the national ambient air quality standards are met, there is an implicit judgment that any

residual emissions are not of significant value or concern because the societal value of concern

are protected by the standard" [p. 9]. Within this context, residual damages would have a zero

externality value.

When the EPA conducts the required study of residual risks some eight to nine years after the

MACT standards are met, the "expectation is that the cost of meeting any further reductions that

are desirable will be internalized if and when more stringent standards are set" [p. 17].

SUPPORTING DOCUMENTATION

None cited.

4

EE-RM-93-801 COMMENT OR12

34]. Clearly "it is not reasonable to conclude that in establishing emission limitations, regulators 

have forgotten to price the residual emissions" [po 31]. 

Environmental Externality Valuation Approaches 

"The real regulatory world does not resemble the one hypothesized by Tellus as the basis for 

its 'revealed preference' approach to valuing residual emissions" [po 30]. 

"If any 'preference' regarding residual emissions is 'revealed' by the current scheme of 

environmental regulation it is that relatively little -- if any -- value should be placed on residual 

emissions because regulators generally believe they have limited emissions to the extent 

necessary to protect health and the environment" [pp. 5-6]. 

"Regulators simply do not as a general matter equate the cost of controlling emissions from any 

particular source with the marginal benefit to society of reducing those emissions ... With a few 

exceptions economic efficiency is not central to the design of the environmental regulatory 

requirements. As a consequence, the total cost of meeting environmental requirements is higher 

than it needs to be" [p. 5]. 

"It is not reasonable to conclude that in establishing emission limitations, regulators have 

forgotten to price the residual emissions" [po 31]. 

"Congress and the Executive Branch are now enthusiastically seeking to utilize market 

mechanisms to achieve environmental objectives in the most cost-effective way possible" [pp. 

30-31]. An example of this approach is the S02 allowance trading system established under the 

1990 amendments to the Clean Air Act. 

Zero Externality Values 

"Where the national ambient air quality standards are met, there is an implicit judgment that any 

residual emissions are not of significant value or concern because the societal value of concern 

are protected by the standard" [po 9]. Within this context, residual damages would have a zero 

externality value. 

When the EPA conducts the required study of residual risks some eight to nine years after the 

MACT standards are met, the "expectation is that the cost of meeting any further reductions that 

are desirable will be internalized if and when more stringent standards are set" [po 17]. 

SUPPORTING DOCUMENTATION 

None cited. 

4 
STEPHEN S. BE OW

Tellus Institute

89 Broad Street

Boston, Massachusetts 02110

PROFILE

Dr. Bernow is Vice President and co-founder of the Tellus Institute. A specialist in

environmental and economic externality issues, he directs the environmental costing projects

at the non-profit organization. These efforts have addressed the environmental costs and

benefits of DSM, gas planning and externalities, externalities in integrated resource planning

and externality valuation methods.

TESTIMONY REFERENCED

"Prepared Testimony of Stephen S. Bernow on Behalf of Citizens for a Better Environment

Concerning Advance Plan 6," Wisconsin Public Service Commission, Docket No. 05-EP-6,

November 25, 1991.

STATE REGULATORY ISSUE ADDRESSED

The Wisconsin Public Service Commission investigated recommendations that it require the

utilities it regulates to include environmental externalities in their resource planning and

operating decisions and examined ways to assign values to externalities.

SUMMARY OF CONCLUSIONS

Dr. Bernow recommends that the Commission require the utilities it regulates to include

environmental externalities in their resource decisions in a consistent manner. By adopting

the monetized values developed by Tellus for EPA criteria air pollutants and air gases,

greenhouse gases and air toxics, he contends that clear comparisons of the economic and

environmental characteristics of resources can be provided. He recommends the use of

monetized adders.

KEY ISSUES

The following issues concerning environmental externalities were raised in Dr. Bernow's

direct testimony and a Tellus Institute report included as an exhibit. Page citations directly

follow all direct quotations from this testimony.

5

EE-RM-93-801 COMMENT OR12

PROFILE 

STEPHEN S. BERNOW 

Tenus Institute 

89 Broad Street 

Boston, Massachusetts 02110 

Dr. Bernow is Vice President and co-founder of the Tellus Institute. A specialist in 

environmental and economic externality issues, he directs the environmental costing projects 

at the non-profit organization. These efforts have addressed the environmental costs and 

benefits of DSM, gas planning and externalities, externalities in integrated resource planning 

and externality valuation methods. 

TESTIMONY REFERENCED 

"Prepared Testimony of Stephen S. Bernow on Behalf of Citizens for a Better Environment 

Concerning Advance Plan 6," Wisconsin Public Service Commission, Docket No. 05-EP-6, 

November 25, 1991. 

STATE REGULATORY ISSUE ADDRESSED 

The Wisconsin Public Service Commission investigated recommendations that it require the 

utilities it regulates to include environmental externalities in their resource planning and 

operating decisions and examined ways to assign values to externalities. 

SUMMARY OF CONCLUSIONS 

Dr. Bernow recommends that the Commission require the utilities it regulates to include 

environmental externalities in their resource decisions in a consistent manner. By adopting 

the monetized values developed by Tellus for EPA criteria air pollutants and air gases, 

greenhouse gases and air toxics, he contends that clear comparisons of the economic and 

environmental characteristics of resources can be provided. He recommends the use of 

monetized adders. 

KEY ISSUES 

The following issues concerning environmental externalities were raised in Dr. Bernow's 

direct testimony and a Tellus Institute report included as an exhibit. Page citations directly 

follow all direct quotations from this testimony. 

5 
Environmental Externality Policy Options

Three policy options are discussed in the Tellus report prepared for Citizens for a Better

Environment and submitted as an exhibit to Mr. Bernow's testimony.

Caps and offsets establish a maximum allowable level of emissions from sources over a

geographic area . Permits issued for the amount of emissions to each source can be traded.

High emission sources can offset emissions in excess of the amount allowable from the

permits they hold by purchasing permits unused by low emission sources. This creates a

market for emission permits. The 1990 Clean Air Act Amendments establish a national cap

on, and an allowance trading system for, SO2 emissions.

Pollution taxes and fees tax emission sources directly based on the amount of emissions.

The revenue is used for general spending purposes or to set up a fund to purchase emission

control equipment. An example is the 1991 New York State Energy Plan.

Planning adders and credits are used to incorporate into the utility planning process the

human health and environmental impacts as adders to explicit accounting costs associated

with each planned alternative. The adders represent the environmental impacts. The means

for evaluating the planning alternatives include ranking, quantification of the physical

amounts of emissions and valuation of environmental externalities in monetary terms.

Valuation of externalities in monetary terms can be accomplished explicitly, based on

damage costs, or implicitly, based on abatement costs.

Environmental Externality Valuation Approaches

Environmental impacts should be monetized to the extent feasible so as to: (a) establish a

common denominator from which to make clear and understandable comparisons between

explicit economic costs and environmental costs; and (b) allow for the "consistent treatment

and evaluation of externalities across utilities and across the different contexts of energy

provision" [p. 5].

Although contending that there is sufficient scientific and economic knowledge to develop

monetized values for "certain environmental impacts ... in some instances monetary valuation

may not be possible or desirable" [p. 5].

Explicit damage estimates of damage caused by environmental externalities is complicated

by atmospheric, biological, chemical, geophysical, ecological and physiological relationships

over time and space as well as socio-economic and cultural conditions. Consequently,

estimating techniques are difficult to perform.

Implied monetary valuations of externalities are based on surveys (contingent valuation) to

estimate society's willingness to pay or be compensated or on ,market proxies (differences

in property values, cost of control, regulators' revealed preferences) of the externality value.

6

EE-RM-93-801 COMMENT OR12

Environmental Externality Policy Options 

Three policy options are discussed in the Tellus report prepared for Citizens for a Better 

Environment and submitted as an exhibit to Mr. Bernow's testimony. 

Caps and offsets establish a maximum allowable level of emissions from sources over a 

geographic area. Permits issued for the amount of emissions to each source can be traded. 

High emission sources can offset emissions in excess of the amount allowable from the 

permits they hold by purchasing permits unused by low emission sources. This creates a 

market for emission permits. The 1990 Clean Air Act Amendments establish a national cap 

on, and an allowance trading system for, S02 emissions. 

Pollution taxes and fees tax emission sources directly based on the amount of emissions. 

The revenue is used for general spending purposes or to set up a fund to purchase emission 

control equipment. An example is the 1991 New York State Energy Plan. 

Planning adders and credits are used to incorporate into the utility planning process the 

human health and environmental impacts as adders to explicit accounting costs associated 

with each planned alternative. The adders represent the environmental impacts. The means 

for evaluating the planning alternatives include ranking, quantification of the physical 

amounts of emissions and valuation of environmental externalities in monetary terms. 

Valuation of externalities in monetary terms can be accomplished explicitly, based on 

damage costs, or implicitly, based on abatement costs. 

Environmental Externality Valuation Approaches 

Environmental impacts should be monetized to the extent feasible so as to: (a) establish a 

common denominator from which to make clear and understandable comparisons between 

explicit economic costs and environmental costs; and (b) allow for the "consistent treatment 

and evaluation of externalities across utilities and across the different contexts of energy 

provision" [po 5]. 

Although contending that there is sufficient scientific and economic knowledge to develop 

monetized values for "certain environmental impacts ... in some instances monetary valuation 

may not be possible or desirable" [po 5]; 

Explicit damage estimates of damage caused by environmental externalities is complicated 

by atmospheric, biological, chemical, geophysical, ecological and physiological relationships 

over time and space as well as socio-economic and cultural conditions. Consequently, 

estimating techniques are difficult to perform. 

Implied monetary valuations of externalities are based on surveys (contingent valuation) to 

estimate society's willingness to payor be compensated or on .market proxies (differences 

in property values, cost of control, regulators' revealed preferences) of the externality value. 

6 
Cost of control monetization, based on regulators' revealed preferences, is used by Tellus

to estimate the following values.

STEPHEN S. BERNOW

MONETIZED EXTERNALITY VALUES*

* These values differ from those given in Dr. Bernow's testimony in Massachusetts and Nevada.

The estimated maximum impact on costs for the Wisconsin system "grows to about 13.5

percent by the year 2010" [p. 9]. The average annual increase is one-half percent above the

rate of increase that would otherwise occur.

7

EE-RM-93-801 COMMENT OR12

Cost of control monetization, based on regulators' revealed preferences, is used by Tellus 

to estimate the following values. 

Pollutant 

S02 

NO" 

eo 

TSPJPM10 

voe 

Pollutant 

STEPHEN S. BERNOW 

MONETIZED EXTERNALITY V ALUES* 

$/ton (high) $/ton (low) $JIb (high) 

$1,560 $0.78 

$4,000 $6,770 $2.00 

$1,000 $2,500 $0.50 

$4,000 $6,000 $2.00 

$1,560 $5,500 $0.78 

$/ton 

$23 

$230 

$4,140 

$JIb (low) 

$3.38 

$1.25 

$3.00 

$2.75 

$/lb 

$0.01 

$0.12 

$2.07 

* These values differ from those given in Dr. Bernow's testimony in Massachusetts and Nevada. 

The estimated maximum impact on costs for the Wisconsin system "grows to about 13.5 

percent by the year 2010" [po 9]. The average annual increase is one-half percent above the 

rate of increase that would otherwise occur. 

7 
Dr. Bernow also presents a set of values for air toxics, which are primarily heavy metals.

STEPHEN S. BE OW

MONETIZED AIR TONICS VALUES

Pollutant w ($/lb) High ($/lb)

Arsenic $292.00 $6,470.00

Beryllium $58.00 $1,294.00

Cadmium $389.00 $8,627.00

Trivalent Chromium $0.29 $6.00

Hexavalent Chromium $58.00 $1,294.00

Lead $209.00 $4,621.00

Mercury $973.00 $21,567.00

"In the case of the air emissions of toxic metals I recommend that the high-end values be

used initially, given the nascent stage of development of the use of such values in utility

planning, the desirability of a risk averse, policy that leans towards environmental and human

health protection, and taking account of the fact that our estimates show that this would not

impose unacceptably high economic penalties on resource selection (for our example it adds

less than 20 percent to overall externalities costs of a new AFBC plant)" [p. 8].

Scope of Monetized Environmental Externalities

Integrated resource planning -- Environmental cost should be incorporated into the resource

selection process on a system-wide, least-cost planning basis. "Thus, if a utility is considering

resource additions (or retirements) and DSM in its long range planning, regulation can

require that it include environmental costs within its planning evaluation and decisionmaking" [p. 93]. "A fully integrated system planning approach could also include the direct

and emissions costs impacts on non-electric sources (e.g., in fossil-fired end-uses that replace

electric generation or in steam boilers that are displaced by cogeneration facilities), that can

be affected by system resource planning decisions" [p. 94].

Full-cost/Environmental dispatching -- This approach would involve adding to variable

operating costs the variable environmental costs associated with continuing operation. "The

result would be full-cost dispatching, that would minimize overall costs -- direct and

externalities -- of operation and reduce overall pollution (along with the aggregate costs of

such pollution) at some increase in direct costs" [p. 94].

Non-utility Resource Impacts -- Externalities should be incorporated into integrated resource

planning. The plan should include environmental impacts from all sources the utility uses

8

EE-RM-93-801 COMMENT OR12

Dr. Bernow also presents a set of values for air toxics, which are primarily heavy metals. 

I 

STEPHEN S. BERNOW 

MONETIZED AIR TOXIeS VALUES 

Pollutant I Low ($/lb) I 

Arsenic $292.00 

Beryllium $58.00 

cadmium $389.00 

Trivalent Chromium $0.29 

Hexavalent Chromium $58.00 

Lead $209.00 

Mercury $973.00 

High ($/lb) I 

$6,470.00 

$1,294.00 

$8,627.00 

$6.00 

$1,294.00 

$4,621.00 

$21,567.00 

"In the case of the air emissions of toxic metals I recommend that the high-end values be 

used initially, given the nascent stage of development of the use of such values in utility 

planning, the desirability of a risk averse policy that leans towards environmental and human 

health protection, and taking account of the fact that our estimates show that this would not 

impose unacceptably high economic penalties on resource selection (for our example it adds 

less than 20 percent to overall externalities costs of a new AFBC plant)" [po 8]. 

Scope of Monetized Environmental Externalities 

Integrated resource planning -- Environmental cost should be incorporated into the resource 

selection process on a system-wide, least-cost planning basis. 'Thus, if a utility is considering 

resource additions (or retirements) and DSM in its long range planning, regulation can 

require that it include environmental costs within its planning evaluation and decisionmaking" [po 93]. "A fully integrated system planning approach could also include the direct 

and emissions costs impacts on non-electric sources (e.g., in fossil-fired end-uses that replace 

electric generation or in steam boilers that are displaced by cogeneration facilities), that can 

be affected by system resource planning decisions" [po 94]. 

Full-cost/Environmental dispatching -- This approach would involve adding to variable 

operating costs the variable environmental costs associated with continuing operation. liThe 

result would be full-cost dispatching, that would minimize overall costs -- direct and 

externalities -- of operation and reduce overall pollution (along with the aggregate costs of 

such pollution) at some increase in direct costs" [po 94]. 

Non-utility Resource Impacts -- Externalities should be incorporated into integrated resource 

planning. The plan should include environmental impacts from all sources the utility uses 

8 
to satisfy energy needs including purchased energy from outside sources, DSM programs and

cogeneration.

Bidding Systems -- When seeking new generating capacity or DSM resources environmental

externality valuations should be incorporated into the competitive bidding process. "Bid

projects should be required to specify their environmental characteristics (e.g., lbs. of NO,,

per mWh), upon which they would then be imputed environmental costs. These costs can

then be used in a protocol for comparing and ranking the projects (again subject to concerns

about viability, etc.)" [p. 97].

Interim CO2 Externality Values

Significant global warming could occur as a result of greenhouse gas emissions of C021

methane, CFCs and nitrous oxide. However, many of the cost analyses of options for

reducing carbon dioxide emissions give a wide range of results because of differences in

methodological approaches and assumptions and country specific situations. "Perhaps the

most important observation is that results can differ by a factor of three or four for a given

level of emissions reductions" [p. 51].

Many countries have established targets for reducing CO2 concentrations but these are not

sufficient and should only be regarded as starting values. Targets on the order of 30 to 60

percent reductions of current CO2 emissions should be anticipated within the next 40 years;

for example, "30 percent by 2010 to 2015 and 50 percent by 2030" [p. 49].

Dr. Bernow proposes a value of $23 per ton of CO.. This cost was developed "from

estimates of the costs of planting trees as a carbon sink; in particular, the costs that would

be incurred in pursuing a significant (but by no means enormous) tree planting program" [p.

54].

Impacts on DSM Resource Selection Options

Demand-side management programs are understood to have environmental benefits

associated with the avoided cost of new resources. Avoided costs include avoided emissions

and their externality values. "The potential of DSM for both reducing costs and improving

local, regional and global environmental quality has been well documented and is compelling.

The reckoning of environmental externalities of power supply in resource planning and

operation will help to realize those benefits" [p. 95].

In addition to the costs and benefits of avoided emissions, DSM technologies have

environmental costs and benefits of their own such as the potential for increased indoor air

pollution from increased building insulation. "At the same time, programmatic DSM may

offer opportunities to avoid these impacts and, indeed, to realize other related benefits (for

example, attending to radon leaks when implementing space heating related programs, or

capturing CFCs with a refrigerator replacement program that might otherwise be released

when the original refrigerator is discarded)" [p. 95].

9

EE-RM-93-801 COMMENT OR12

to satisfy energy needs including purchased energy from outside sources, DSM programs and 

cogeneration. 

Bidding Systems -- When seeking new generating capacity or DSM resources environmental 

externality valuations should be incorporated into the competitive bidding process. IIBid 

projects should be required to specify their environmental characteristics (e.g., lbs. of NOx 

per mWh), upon which they would then be imputed environmental costs. These costs can 

then be used in a protocol for comparing and ranking the projects (again subject to concerns 

about viability, etc.)" [po 97]. 

Interim CO2 Externality Values 

Significant global warming could occur as a result of greenhouse gas emissions of CO2, 

methane, CFCs and nitrous oxide. However, m~ny of the cost analyses of options for 

reducing carbon dioxide emissions give a wide range of results because of differences in 

methodological approaches and assumptions and country specific situations. "Perhaps the 

most important observation is that results can differ by a factor of three or four for a given 

level of emissions reductions" [po 51]. 

Many countries have established targets for reducing CO2 concentrations but these are not 

sufficient and should only be regarded as starting values. Targets on the order of 30 to 60 

percent reductions of current CO2 emissions should be anticipated within the next 40 years; 

for example, 1130 percent by 2010 to 2015 and 50 percent by 2030" [po 49]. 

Dr. Bernow proposes a value of $23 per ton of CO2. This cost was developed "from 

estimates of the costs of planting trees as a carbon sink; in particular, the costs that would 

be incurred in pursuing a significant (but by no means enormous) tree planting programll [po 

54]. 

Impacts on DSM Resource Selection Options 

Demand-side management programs are understood to have environmental benefits 

associated with the avoided cost of new resources. Avoided costs include avoided emissions 

and their externality values. liThe potential of DSM for both reducing costs and improving 

local, regional and global environmental quality has been well documented and is compelling. 

The reckoning of environmental externalities of power supply in resource planning and 

operation will help to realize those benefits" [po 95]. 

In addition to the costs and benefits of avoided emISSIOns, DSM technologies have 

environmental costs and benefits of their own such as the potential for increased indoor air 

pollution from increased building insulation. "At the same time, programmatic DSM may 

offer opportunities to avoid these impacts and, indeed, to realize other related benefits (for 

example, attending to radon leaks when implementing space heating related programs, or 

capturing CFCs with a refrigerator replacement program that might otherwise be released 

when the original refrigerator is discarded)" [po 95]. 

9 
Fuel Switching

Environmental impacts should be taken into account in end-use fuel switching such as from

electricity to natural gas. "As with power supply options end-use fuel switching may also

involve upstream impacts associated with extraction, processing and delivery of the fuels

(e.g., natural gas leaks, oil spills, transport energy costs, etc.) that could be taken into

account" [p. 95]. Mr. Bernow suggests that for simplicity the analysis should be limited to

the generation and end-use stages.

Cogeneration

It is important to account for the environmental impacts of cogeneration since it is becoming

more important in meeting energy and environmental goals. "If both electricity and process

thermal energy are produced by such a system, where these would otherwise be produced

separately, an emissions credit or offset should be computed to adjust the gross emissions

for electricity generation to a net impact that takes account of both the marginal energy

needed to effect cogeneration and the emissions reduction associated with the reduction in

fuel use for the thermal only operation" [p. 96]. The following equation could be used to

calculate the net emissions of cogenerators.

Let: Enet = Net cogenerator emissions coefficient (pounds/MMBtu)

Egross = Gross cogenerator emissions coefficient (pounds/MMBtu)

Eboiler = Avoided boiler emissions coefficient (pounds/MMBtu)

Scogen = Steam efficiency of the cogenerator (percent)

Sboiler = Steam efficiency of the avoided boiler (percent)

Then: Enet = Egross - Eboiler x (Scogen/boiler)

Multiplying Enet by the facility's heat rate (in MMBtu per kWh) gives the net cogenerator

emissions in pounds per kWh.

SUPPORTING DOCUMENTATION

Although references were not cited in the direct testimony, the Tellus report ("Valuation of

Environmental Externalities for Electric Utility Resource Planning in Wisconsin") upon

which the testimony in based and included as an exhibit, contains numerous references.

10

EE-RM-93-801 COMMENT OR12

Fuel Switching 

Environmental impacts should be taken into account in end-use fuel switching such as from 

electricity to natural gas. liAs with power supply options end-use fuel switching may also 

involve upstream impacts associated with extraction, processing and delivery of the fuels 

(e.g., natural gas leaks, oil spills, transport energy costs, etc.) that could be taken into 

account" [po 95]. Mr. Bernow suggests that for simplicity the analysis should be limited to 

the generation and end-use stages. 

Cogeneration 

It is important to account for the environmental impacts of cogeneration since it is becoming 

more important in meeting energy and environmental goals. "If both electricity and process 

thermal energy are produced by such a system, where these would otherwise be produced 

separately, an emissions credit or offset should be computed to adjust the gross emissions 

for electricity generation to a net impact that takes account of both the marginal energy 

needed to effect cogeneration and the emissions reduction associated with the reduction in 

fuel use for the thermal only operation" [po 96]. The following equation could be used to 

calculate the net emissions of cogenerators. 

Let: Enet = Net cogenerator emissions coefficient (pounds/MMBtu) 

Egross = Gross cogenerator emissions coefficient (pounds/MMBtu) 

Eboiler = Avoided boiler emissions coefficient (pounds/MMBtu) 

Scogen = Steam efficiency of the cogenerator (percent) 

Sboiler = Steam efficiency of the avoided boiler (percent) 

Then: Enet -

Multiplying Enet by the facility's heat rate (in MMBtu per kWh) gives the net cogenerator 

emissions in pounds per kWh. 

SUPPORTING DOCUMENTATION 

Although references were not cited in the direct testimony, the Tellus report ("Valuation of 

Environmental Externalities for Electric Utility Resource Planning in Wisconsin") upon 

which the testimony in based and included as an exhibit, contains numerous references. 

10 
SHEPARD C. BUCHANAN

Bonneville Power Administration

5904 NE Everett Street

Portland, Oregon 97213

PROFILE

Mr. Buchanan is employed by the Bonneville Power Administration (BPA) as a consulting

economist on energy and environmental matters. Since joining the agency in 1982, he has

headed the BPA's Environmental Costs and Benefits Program. In addition to serving as an

expert witness on environmental costs and energy planning, he worked with Pace University

on a project to advise the State of New York on incorporating environmental externalities

into utility resource planning.

TESTIMONY REFERENCED

"Direct Testimony of Shepard C. Buchanan on Behalf of the Staff of the Public Service

Commission of Wisconsin Concerning Advance Plan 6," Wisconsin Public Service

Commission, Docket No. 05-EP-6, November 25, 1991.

STATE REGULATORY ISSUE ADDRE SSED

The Wisconsin Public Service Commission examined whether it should require the utilities

it regulates to account for environmental externalities in their resource planning and

operating decisions and also investigated examined methods of incorporating externalities.

SUMMARY OF CONCLUSIONS

Mr. Buchannan provides an overview of environmental externalities, methods for

monetization and approaches for incorporating these values in utility regulatory actions. He

concludes with observations on the environmental costs he expects to be associated with the

Wisconsin system.

ISSUES

The following issues concerning environmental externalities were raised in the direct

testimony or Shepard C. Buchanan. Page citations directly follow all direct quotations from

this testimony.

11

EE-RM-93-801 COMMENT OR12

PROFILE 

SHEPARD C. BUCHANAN 

Bonneville Power Administration 

5904 NE Everett Street 

Portland, Oregon 97213 

Mr. Buchanan is employed by the Bonneville Power Administration (BP A) as a consulting 

economist on energy and environmental matters. Since joining the agency in 1982, he has 

headed the BP A's Environmental Costs and Benefits Program. In addition to serving as an 

expert witness on environmental costs and energy planning, he worked with Pace University 

on a project to advise the State of New York on incorporating environmental externalities 

into utility resource planning. 

TESTIMONY REFERENCED 

"Direct Testimony of Shepard C. Buchanan on Behalf of the Staff of the Public Service 

Commission of Wisconsin Concerning Advance Plan 6," Wisconsin Public Service 

Commission, Docket No. 05-EP-6, November 25, 1991. 

STATE REGULATORY ISSUE ADDRESSED 

The Wisconsin Public Service Commission examined whether it should require the utilities 

it regulates to account for environmental externalities in their resource planning and 

operating decisions and also investigated examined methods of incorporating externalities. 

SUMMARY OF CONCLUSIONS 

Mr. Buchannan provides an overview of environmental externalities, methods for 

monetization and approaches for incorporating these values in utility regulatory actions. He 

concludes with observations on the environmental costs he expects to be associated with the 

Wisconsin system. 

KEY ISSUES 

The following issues concerning environmental externalities were raised in the direct 

testimony or Shepard C. Buchanan. Page citations directly follow all direct quotations from 

this testimony. 

11 
Environmental Externality Policy Options

There are several ways that regulatory authorities can implement environmental externality

considerations.

Resource planning is the most widely discussed avenue. By considering all costs when

planning resource activities, utilities are: (a) responding to customers' environmental

concerns; (b) anticipating environmental impacts of resources and avoiding future costly

retrofits; (c) identifying resource alternatives that may otherwise not have been identified;

and (d) fulfilling the governmental function of considering all "costs citizens will bear as a

result of planning decisions undertaken by regulated utilities" [p. 18].

Demand-side management can be assessed in terms of cost-effectiveness when monetized

externalities are included. A utility and its regulator then "can determine the true avoided

cost faced by the utility" [p. 19]. Even if the externalities "are not monetized, identifying

them and evaluating them through other means can help utilities and their regulators

develop ISM program targets" [p.19].

Rates, which reflect the full cost of externalities, "would result in reduced purchase [of

electricity] and, as a result, reduced environmental externalities" [p. 20].

Scope of Monetized Environmental Externalities

"Externality costs are costs imposed by residual environmental effects which occur after all

regulatory standards and emissions levels have been met. Thus, even when a resource

complies with all existing laws and regulations, it still can produce environmental costs" [p.

15].

Accounting for environmental externalities in resource planning "is prudent from a ratepayer

point of view because it is the ratepayer who eventually will be required to bear the cost of

today's externalities" [p. 15].

Environmental Externality Valuation Approaches

Mr. Buchannan defines both monetary valuations that ascribe dollar costs to specified

externalities and qualitative methods that rank the severity of importance of the externalities.

He focuses on the former evaluation methods as they "much more clearly reveal a decisionmaker's priorities and method of accounting for the real economic damage associated with

environmental externalities" [p. 6]. Specifically, he addresses three methods.

Contingent valuation "involves surveying affected parties and asking them, directly, how

much they would be willing to pay to avoid certain environmental externalities or how much

they would require as compensation to voluntarily incur those externalities" [p. 18]. He

believes this is the most direct way to evaluate the cost of externalities to society.

12

EE-RM-93-801 COMMENT OR12

Environmental Externality Policy Options 

There are several ways that regulatory authorities can implement environmental externality 

considerations. 

Resource planning is the most widely discussed avenue. By considering all costs when 

planning resource activities, utilities are: (a) responding to customers' environmental 

concerns; (b) anticipating environmental impacts of resources and avoiding future costly 

retrofits; (c) identifying resource alternatives that may otherwise not have been identified; 

and (d) fulfilling the governmental function of considering all "costs citizens will bear as a 

result of planning decisions undertaken by regulated utilities" [po 18]. 

Demand-side management can be assessed in terms of cost-effectiveness when monetized 

externalities are included. A utility and its regulator then "can determine the true avoided 

cost faced by the utility" [po 19]. Even if the externalities "are not monetized, identifying 

them and evaluating them through other means can help utilities and their regulators 

develop DSM program targets" [p.19]. 

Rates, which reflect the full cost of externalities, "would result in reduced purchase [of 

electricity] and, as a result, reduced environmental externalities" [po 20]. 

Scope of Monetized Environmental Externalities 

"Externality costs are costs imposed by residual environmental effects which occur after all 

regulatory standards and emissions levels have been met. Thus, even when a resource 

complies with all existing laws and regulations, it still can produce environmental costs" [po 

15]. 

Accounting for environmental externalities in resource planning "is prudent from a ratepayer 

point of view because it is the ratepayer who eventually will be required to bear the cost of 

today's externalities" [po 15]. 

Environmental Externality Valuation Approaches 

Mr. Buchannan defines both monetary valuations that ascribe dollar costs to specified 

externalities and qualitative methods that rank the severity of importance of the externalities. 

He focuses on the former evaluation methods as they "much more clearly reveal a decisionmaker's priorities and method of accounting for the real economic damage associated with 

environmental externalities" [po 6]. Specifically, he addresses three methods. 

Contingent valuation "involves surveying affected parties and asking them, directly, how 

much they would be willing to pay to avoid certain environmental externalities or how much 

they would require as compensation to voluntarily incur those externalities" [po 18]. He 

believes this is the most direct way to evaluate the cost of externalities to society. 

12 
Control costs incorporate various techniques which involve determining the "marginal cost

of reducing, abating or mitigating an externality" [p. 9]. Also referred to as implied valuation

or revealed preference, control costs "show the amount of direct costs of pollution control

devices or other costly activities that could be saved by reducing the extent of externalities"

[p. 9].

Damage costs are based on physical estimates of the actual changes in the environment as

well as the ensuing changes in the goods and services provided by the environment. After

identifying the changes, a variety of techniques can be used to monetize them. "Some can

be priced directly... other effects can be costed using agreed-upon published values...and some

affects may require original studies to estimate values" [p. 10].

These methods share the following common features:

® each can identify how much society should be willing to pay to avoid the

environmental externality" [p. 7] that imposes or threatens to impose a damage or

cost on society;

® the methods are "well understood and their use is theoretically justified" [p. 7]; and

the methods have "particular strengths and weaknesses which make them more or

less appropriate for certain applications " [p. 7].

In using the three monetization methods, "it is the lower control or damage cost which

should be applied" [p. 7].

Quantitative and qualitative methods can be applied individually or combined. Their

development "is limited only by the creativity of their practitioners" [pp. 12-13]. Mr.

Buchannan briefly characterizes such monetary evaluation techniques.

Percentage of total cost provides an economic advantage for a resource type "by

reducing its overall cost by some percentage or by increasing other resource costs by

some percentage " [p. 11]. The 15 percent adder assigned to noncombustion

alternatives by the Wisconsin Commission is an example.

Other quantitative techniques assign scores and weights to environmental

characteristics. The resource with the lowest total score (where the lower the

number, the lower the environmental effect) would be preferred.

® Qualitative techniques rely on judgment in relative rankings of resource types.

Impacts on DSM Resource Options

Mr. Buchannan, while noting the disparity found between the monetized externality costs

advanced by the Bonneville Power Administration and in the Pace study, states that

13

EE-RM-93-801 COMMENT OR12

Control costs incorporate various techniques which involve determining the "marginal cost 

of reducing, abating or mitigating an externality" [po 9]. Also referred to as implied valuation 

or revealed preference, control costs "show the amount of direct costs of pollution control 

devices or other costly activities that could be saved by reducing the extent of externalities" 

[p.9]. 

Damage costs are based on physical estimates of the actual changes in the environment as 

well as the ensuing changes in the goods and services provided by the environment. After 

identifying the changes, a variety of techniques can be used to monetize them. "Some can 

be priced directly ... other effects can be costed using agreed-upon published values ... and some 

affects may require original studies to estimate values" [po 10]. 

These methods share the following common features: 

• each can identify how much society should be willing to pay to avoid the 

environmental externality" [po 7] that imposes or threatens to impose a damage or 

cost on society; 

• the methods are "well understood and their use is theoretically justified" [po 7]; and 

• the methods have "particular strengths and weaknesses which make them more or 

less appropriate for certain applications" [po 7]. 

In using the three monetization methods, "it is the lower control or damage cost which 

should be applied" [po 7]. 

Quantitative and qualitative methods can be applied individually or combined. Their 

development "is limited only by the creativity of their practitioners" [pp. 12-13]. Mr. 

Buchannan briefly characterizes such monetary evaluation techniques. 

• Percentage of total cost provides an economic advantage for a resource type "by 

reducing its overall cost by some percentage or by increasing other resource costs by . 

some percentage" [po 11]. The 15 percent adder assigned to noncombustion 

alternatives by the Wisconsin Commission is an example. 

Other quantitative techniques assign scores and weights to environmental 

characteristics. The resource with the lowest total score (where the lower the 

number, the lower the environmental effect) would be preferred. 

Qualitative techniques rely on judgment in relative rankings of resource types. 

Impacts on DSM Resource Options 

Mr. Buchannan, while noting the disparity found between the monetized externality costs 

advanced by the Bonneville Power Administration and in the Pace study, states that 

13 
"inclusion of these costs in resource decisions could make significant amounts of

environmentally benign renewables and DSM programs more attractive " [p. 14].

In Wisconsin, 67 percent of the installed capacity in 1990 was coal-fired. "The available

short-term and long-term environmental costs are at least 1.7 v./kWh and may be as high as

4.0 0/kWh" [p.26].

As these externality costs are fully one-third as much as the internal costs of a new coal

plant (according to BPA estimates) or almost equal to the internal costs (according to the

Nevada PUC values), Mr. Buchannan concludes that "these costs suggests that it would be

difficult to over-invest in energy efficiency through, the implementation of DSM programs"

[p. 28].

Fuel Switching

"Any analysis of environmental externalities will support fuel switching for certain end-uses"

[p. 24]. In its 1990 Resource Program, the BPA found by reducing the forecasted

installation of new and replacement electric water heaters from 80 percent to 50 percent,

"significant environmental benefits... could be had at a negative cost" [p. 25]. This is

attributable to a nearly half-billion dollar savings in total energy bills derived from "reduced

investment in new electric generation, saved operating costs of existing resources, increased

export sales and lower consumer utility bills" [p. 25].

SUPPORTING DOCUMENTATION

Mitchell, Robert and Richard Carson. Using Surveys to Value Public Goods: The Contingent

Valuation Method. Washington, DC: Resources for the Future, 1989.

National Academy of Sciences. Policy Implications of Greenhouse Warming. Washington, DC:

National Academy Press, 1991.

Moskovitz, David H. "Why We Need an Environmental Trust Fund."

Katz, Myron B. "Proper Price Signals: The Case for Reflecting Externalities in Utility Rates."

14

EE-RM-93-801 COMMENT OR12

"inclusion of these costs in resource decisions could make significant amounts of 

environmentally benign renewables and DSM programs more attractive" [po 14]. 

In Wisconsin, 67 percent of the installed capacity in 1990 was coal-fired. liThe available 

short-term and long-term environmental costs are at least 1.7 ¢/kWh and may be as high as 

4.0 ¢/kWh" [p.26]. 

As these externality costs are fully one-third as much as the internal costs of a new coal 

plant (according to BP A estimates) or almost equal to the internal costs (according to the 

Nevada PUC values), Mr. Buchannan concludes that "these costs suggests that it would be 

difficult to over-invest in energy efficiency through the implementation of DSM programs" 

[po 28]. 

Fuel Switching 

"Any analysis of environmental externalities will support fuel switching for certain end-uses" 

[po 24]. In its 1990 Resource Program, the BPA found by reducing the forecasted 

installation of new and replacement electric water heaters from 80 percent to 50 percent, 

"significant environmental benefits ... could be had at a negative cost" [po 25]. This is 

attributable to a nearly half-billion dollar savings in total energy bills derived from "reduced 

investment in new electric generation, saved operating costs of existing resources, increased 

export sales and lower consumer utility bills" [po 25]. 

SUPPORTING DOCUMENTATION 

Mitchell, Robert and Richard Carson. Using Swveys to Value Public Goods: The Contingent . 

Valuation Method. Washington, DC: Resources for the Future, 1989. 

National Academy of Sciences. Policy Implications of Greenhouse Warming. Washington, DC: 

National Academy Press, 1991. 

Moskovitz, David H. I1Why We Need an Environmental Trust Fund." 

Katz, Myron B. I1Proper Price Signals: The Case for Reflecting Externalities in Utility Rates." 

14 
EMILY J. CA ILL

Resource Insight, Inc.

18 Tremont Street -- Suite 1000

Boston, Massachusetts 02108

PROFILE

Ms. Caverhill is a research associate at Resource Insight, Inc., a consulting firm whose clients

include state utility commission staff, environmental advocates, independent energy

producers, consumer advocates and gas utility companies. A former intern with the

Conservation Law Foundation of New England, she now concentrates on preparing reports

and testimony on the valuation of environmental externalities of power generation.

TESTIMONY REFERENCED

"Direct Testimony of Emily J. Caverhill on Behalf of the City of Chicago in Proceedings to

Adopt a Comprehensive Electric Energy Plan for the State of Illinois," Illinois Commerce

Commission, ICC Docket No. 91-0050," May 15, 1991.

STATE REGULATORY ISSUE ADDRESSED

The Illinois Commerce Commission (ICC) undertook an examination of recommended

approaches to addressing environmental externalities in the least-cost planning process. The

investigation focused on two proposals: (1) adopt a schedule for the development of a

valuation method that would be adopted in Illinois by 1992; and (2)' adopt a marginal cost

of control methodology, and preliminary externality values based on that method, in the 1994

statewide plan.

SUMMARY OF CONCLUSIONS

Ms. Caverhill concludes that, as marginal cost of control is "clearly superior to other

valuation methods" [p. 5], this approach should serve as the basis for incorporating

monetized costs of fossil generation into electric utility cost-effectiveness analyses.

Specifically, non-zero preliminary externality values for five air pollutants should be used by

electric utilities in evaluating DSM measures and in utility integration analyses. The values

advanced by Ms. Caverhill (in 1990 $/ton of pollutant emitted) are $22 for C021 $1000 for

SO2, $3000 for NO,,, $5500 for VOCs and $1700 for particulates (TSPs). In addition, an

externality benefit of 4.3v/kWh should be assigned to DSM options.

15

EE-RM-93-801 COMMENT OR12

PROFILE 

EMILY J. CA VERRILL 

Resource Insight, Inc. 

18 Tremont Street •• Suite 1000 

Boston, Massachusetts 02108 

Ms. Caverhill is a research associate at Resource Insight, Inc., a consulting firm whose clients 

include state utility commission staff, environmental advocates, independent energy 

producers, consumer advocates and gas utility companies. A former intern with the 

Conservation Law Foundation of New England, she now concentrates on preparing reports 

and testimony on the valuation of environmental externalities of power generation. 

TESTIMONY REFERENCED 

"Direct Testimony of Emily J. Caverhill on Behalf of the City of Chicago in Proceedings to 

Adopt a Comprehensive Electric Energy Plan for the State of Illinois," Illinois Commerce 

Commission, ICC Docket No. 91-0050," May 15, 1991. 

STATE REGULATORY ISSUE ADDRESSED 

The Illinois Commerce Commission (ICC) undertook an examination of recommended 

approaches to addressing environmental externalities in the least-cost planning process. The 

investigation focused on two proposals: (1) adopt a schedule for the development of a 

valuation method that would be adopted in Illinois by 1992; and (2) adopt a marginal cost 

of control methodology, and preliminary externality values based on that method, in the 1994 

statewide plan. 

SUMMARY OF CONCLUSIONS 

Ms. Caverhill concludes that, as marginal cost of control is "clearly superior to other 

valuation methods" [po 5], this approach should serve as the basis for incorporating 

monetized costs of fossil generation into electric utility cost-effectiveness analyses. 

Specifically, non-zero preliminary externality values for five air pollutants should be used by 

electric utilities in evaluating DSM measures and in utility integration analyses. The values 

advanced by Ms. Caverhill (in 1990 $/ton of pollutant emitted) are $22 for CO2, $1000 for 

S02' $3000 for NOx, $5500 for VOCs and $1700 for particulates (TSPs). In addition, an 

externality benefit of 4.3¢/kWh should be assigned to DSM options. 

15 
ISSUES

The following issues concerning environmental externalities were raised in the direct

testimony of Ms. Caverhill. Page citations directly follow all direct quotations from their

testimony.

Environmental Externality Policy Options

Ms. Caverhill recommends three ways in which environmental effects and regulations should

be reflected in electric utility resource planning and acquisition.

Mitigation estimates, for effects that will be mitigated, would "cover current costs of existing

rules, future costs of existing rules and future costs of expected rules" [p. 17].

Forecasts of residual effects costs that "will be internalized through taxes, fees, emissions

caps or any other method" [p. 17].

Monetize residual effects that "remain after mitigation efforts and that will not be

internalized" [p. 18] using a highest marginal cost of control methodology.

Environmental Externality Valuation Approaches

Ms. Caverhill discusses four approaches currently used to value and apply pollutant impacts:

marginal cost of control, percent adder, direct costing and weighting and ranking.

Marginal cost of control "uses existing data on the costs and efficiencies of control measures

to determine the externalities of utility resource options. For regulated pollutants... this

entails identifying the marginal control measures and their costs. For unregulated

externalities, such as...C02, the externality value is determined by examining the costs of

various mitigation measures, such as tree planting for C02, and determining the cost to meet

a predetermined emissions target" [p. 21].

In accordance with the basic rationales underlying this method, implied preference (i.e.,

societal willingness to pay) and avoided control cost (i.e., costs of required controls directly

establish the monetary benefits of emissions reductions), "only the cost of the marginal

control measure, usually the most stringent measure with the highest cost (emphasis added),

is important" [p. 25].

Percent adder, the addition of a specific percentage to certain less desirable resource

options, provides "no direct relationship between a utility's direct avoided cost and its

externalities [and, therefore,] the choice of an adder is arbitrary" [p. 28].

Direct costing is an attempt "to establish the cost of externalities by estimating their effects

on humans and their environment" [p. 28]. As the "direct estimation of environmental costs

16

EE-RM-93-801 COMMENT OR12

KEY ISSUES 

The following issues concerning environmental externalities were raised in the direct 

testimony of Ms. Caverhill. Page citations directly follow all direct quotations from their 

testimony. 

Environmental Externality Policy Options 

Ms. Caverhill recommends three ways in which environmental effects and regulations should 

be reflected in electric utility resource planning and acquisition. 

Mitigation estimates, for effects that will be mitigated, would "cover current costs of existing 

rules, future costs of existing rules and future costs of expected rules" [po 17]. 

Forecasts of residual effects costs that "will be internalized through taxes, fees, emissions 

caps or any other method" [po 17]. 

Monetize residual effects that "remain after mitigation efforts and that will not be 

internalized" [po 18] using a highest marginal cost of control methodology. 

Environmental Externality Valuation Approaches 

Ms. Caverhill discusses four approaches currently used to value and apply pollutant impacts: 

marginal cost of control, percent adder, direct costing and weighting and ranking. 

Marginal cost of control "uses existing data on the costs and efficiencies of control measures 

to determine the externalities of utility resource options. For regulated pollutants ... this 

entails identifying the marginal control measures and their costs. For unregulated 

externalities, such as ... C02, the externality value is determined by examining the costs of 

various mitigation measures, such as tree planting for CO2, and determining the cost to meet 

a predetermined emissions target" [po 21]. 

In accordance with the basic rationales underlying this method, implied preference (i.e., 

societal willingness to pay) and avoided control cost (i.e., costs of required controls directly 

establish the monetary benefits of emissions reductions), "only the cost of the marginal 

control measure, usually the most stringent measure with the highest cost (emphasis added), 

is important" [po 25]. 

Percent adder, the addition of a specific percentage to certain less desirable resource 

options, provides "no direct relationship between a utility's direct avoided cost and its 

externalities [and, therefore,] the choice of an adder is arbitrary" [po 28]. 

Direct costing is an attempt "to establish the cost of externalities by estimating their effects 

on humans and their environment" [po 28]. As the "direct estimation of environmental costs 

16 
is a daunting and time consuming task...[it] is not appropriate for use in Illinois utility

planning at this time" [pp. 28-29].

Weighting and ranking "is a complicated and often completely subjective determination of

the relative value of reducing specific externalities " [p. 30]. "If there were no other method

of estimating the value of reducing externalities, this method might be better than assigning

them a zero value. However, the explicit monetization methods (cost of control and direct

costing) are better costing tools " [p. 31].

Comparative Advantages of Marginal Cost of Control

This method is preferable to qualitative or subjective approaches for considering

environmental externalities in utility planning because:

® it "relies on the legislators and environmental regulators, rather than the utilities and

their rate-regulating agencies, to assign dollar values to the external effects of utility

operations" [p. 31];

® the externality values developed "are consistent within geographic regions" [p. 32];

® it "provides consistency across utility resource options" [p. 32]; and

® it sends "a consistent signal about the worth of specific innovations or improvements"

[p. 33] to utilities.

Impacts on DSM Resource Options

Established externality values should be used in the screening of DSM measures with the

externality benefits of DSM being the avoided externalities of the marginal (or displaced)

generating units. Given the values advanced by Ms. Caverhill, the avoided externality cost

for DSM displacing low sulfur coal-fired energy would be 4.3¢/kWh for Illinois electric

utilities.

"Integration of DSM with supply-side resources will require the use of the individual

preliminary externality values. All externality values should rise over time with inflation" [p.

60].

SUPPORTING DOCUMENTATION

None cited in the direct testimony although references are cited in the attachment labeled

Exhibit No. 2.0.

17

EE-RM-93-801 COMMENT OR12

is a daunting and time consuming task ... [it] is not appropriate for use in lllinois utility 

planning at this time" [pp. 28-29]. 

Weighting and ranking "is a complicated and often completely subjective determination of 

the relative value of reducing specific externalities II [po 30]. "If there were no other method 

of estimating the value of reducing externalities, this method might be better than assigning 

them a zero value. However, the explicit monetization methods (cost of control and direct 

costing) are better costing tools" [po 31]. 

Comparative Advantages of Marginal Cost of Control 

This method is preferable to qualitative or subjective approaches for considering 

environmental externalities in utility planning because: 

e it "relies on the legislators and environmental regulators, rather than the utilities and 

their rate-regulating agencies, to assign dollar values to the external effects of utility 

operations II [po 31]; 

e the externality values developed "are consistent within geographic regions" [po 32]; 

e it "provides consistency across utility resource options II [po 32]; and 

e it sends "a consistent signal about the worth of specific innovations or improvements" 

[po 33] to utilities. 

Impacts on DSM Resource Options 

Established externality values should be used in the screening of DSM measures with the 

externality benefits of DSM being the avoided externalities of the marginal (or displaced) 

generating units. Given the values advanced by Ms. Caverhill, the avoided externality cost 

for DSM displacing low sulfur coal-fired energy would be 4.3¢/kWh for lllinois electric 

utilities. 

"Integration of DSM with supply-side resources will require the use of the individual 

preliminary externality values. All externality values should rise over time with inflation" [po 

60]. 

SUPPORTING DOCUMENTATION 

None cited in the direct testimony although references are cited in the attachment labeled 

Exhibit No. 2.0. 

17 
MARC W. GOLDSMITH

Energy Research Group, Inc.

400 Fifth Avenue

Waltham, Massachusetts 02154

PROFILE

Mr. Goldsmith is president of Energy Research Group, Inc., an energy consulting firm

specializing in energy management, strategic planning, technology assessment, regulatory and

environmental affairs, policy analysis and communications. Among the consulting services

provided to utility and private clients throughout the United States and abroad since 1973

is the preparation and presentation of expert witness testimony on energy issues.

TESTIMONY REFERENCED

"Direct Testimony of Marc W. Goldsmith on Behalf of Central Illinois Light Company,

Central Illinois Public Service Company, Commonwealth Edison Company, Illinois Power

Company, Iowa-Illinois Gas and Electric Company and Union Electric Company in

Proceedings to Adopt a Comprehensive Electric Energy Plan for the State of Illinois," Illinois

Commerce Commission, ICC Docket No. 91-0050," August, 1991.

STATE REGULATORY ISSUE ADDRESSED

The Illinois Commerce Commission (ICC) undertook an examination of recommended

approaches to addressing environmental externalities in the least-cost planning process. The

investigation focused on two proposals: (1) adopt a schedule for the development of a

valuation method that would be adopted in Illinois by 1992 ; and (2) adopt a marginal cost

of control methodology, and preliminary externality values based on that method, in the 1994

statewide plan.

SUMMARY OF CONCLUSIONS

Mr. Goldsmith concludes that the quality and quantity of available data on environmental

impacts are insufficient to justify the assignment of monetized values to environmental

externalities. Therefore, he agrees that the informal process recommended by the

Department of Energy and Natural Resources (DENR) and supported by the Joint Illinois

Utilities be adopted by the ICC. He does, however, caution that the objectives of this

process should include: the establishment of analytic boundaries (i.e., measuring

environmental impacts at the point of generation, throughout the fuel cycle or at the

end-use); the avoidance of bias toward any fuel source; the evaluation of the externality

universe and the position of environmental externalities within that universe; the recognition

18

EE-RM-93-801 COMMENT OR12

PROFILE 

MARC W. GOLDSMITH 

Energy Research Group, Inc. 

400 Fifth Avenue 

Waltham, Massachusetts 02154 

Mr. Goldsmith is president of Energy Research Group, Inc., an energy consulting firm 

specializing in energy management, strategic planning, technology assessment, regulatory and 

environmental affairs, policy analysis and communications. Among the consulting services 

provided to utility and private clients throughout the United States and abroad since 1973 

is the preparation and presentation of expert witness testimony on energy issues. 

TESTIMONY REFERENCED 

"Direct Testimony of Marc W. Goldsmith on Behalf of Central lllinois Light Company, 

Central lllinois Public Service Company, Commonwealth Edison Company, lllinois Power 

Company, Iowa-lllinois Gas and Electric Company and Union Electric Company in 

Proceedings to Adopt a Comprehensive Electric Energy Plan for the State of Illinois," Illinois 

Commerce Commission, ICC Docket 'No. 91-0050," August, 1991. 

STATE REGULATORY ISSUE ADDRESSED 

The Illinois Commerce Commission (ICC) undertook an examination of recommended 

approaches to addressing environmental externalities in the least-cost planning process. The 

investigation focused on two proposals: (1) adopt a schedule for the development of a 

valuation method that would be adopted in Illinois by 1992 ; and (2) adopt a marginal cost 

of control methodology, and preliminary externality values based on that method, in the 1994 

statewide plan. 

SUMMARY OF CONCLUSIONS 

Mr. Goldsmith concludes that the quality and quantity of available data on environmental 

impacts are insufficient to justify the assignment of monetized values to environmental 

externalities. Therefore, he agrees that the informal process recommended by the 

Department of Energy and Natural Resources (DENR) and supported by the Joint Illinois 

Utilities be adopted by the ICC. He does, however, caution that the objectives of this 

process should include: the establishment of analytic boundaries (i.e., measuring 

environmental impacts at the point of generation, throughout the fuel cycle or at the 

end-use); the avoidance of bias toward any fuel source; the evaluation of the externality 

universe and the position of environmental externalities within that universe; the recognition 

18 
of constraints imposed by the absence of adequate data; and the inclusion of both costs and

benefits in any determination of monetized environmental externality values.

Y ISSUES

The following issues concerning environmental externalities were raised in the direct testimony

of Mr. Goldsmith. Page citations directly follow all direct quotations from this testimony.

Environmental Externality Valuation Approaches

Mr. Goldsmith discusses three primary approaches currently used to value the impacts of

pollutants: direct impact assessment, shadow pricing (also termed "cost of control") and

environmental weighting and ranking.

Direct impact assessment, which provides a dollar-per-pound cost based on actual impacts, is

recognized as the optimal approach to valuating pollutants costs. However, because it is a data

intensive and costly process, alternate approaches have been sought.

Shadow pricing, which measures the costs of incremental increase in pollution control at and

beyond the cost of either Best Available Control Technology or the most stringent regulation,

is based on the assumption that incremental control costs can be equated to the incremental cost

of that pollutant's impact on society and that the higher the control cost, the greater the amount

of external impact. Although shadow pricing allows a number to be easily derived, this

methodology does not answer the question of what society should be willing to pay to mitigate

air pollution.

Environmental weighting and ranking uses estimates derived through a number of

methodologies to ascertain the relative impact of a given pollutant on the environment. Although

a somewhat more subjective approach, it directs the focus to the relative importance of certain

pollutants within an overall context that permits comparisons with other intrinsic costs and

benefits of an alternative supply- or demand-side resource.

Scope of Monetized Environmental Externalities

Environmental externalities, a subset of the wider externalities universe, "are defined as all the

costs and benefits not borne by producers or consumers in the course of production or

consumption. The determination of externalities requires a valuation of both external costs and

external benefits" [p. 4].

In practice, the definition of environmental externalities has been narrowed by the few state

regulatory commissions that have assigned monetized values chiefly to air pollutants emitted by

electricity generation facilities operated by investor-owned utilities.

19

EE-RM-93-801 COMMENT OR12

of constraints imposed by the absence of adequate data; and the inclusion of both costs and 

benefits in any determination of monetized environmental externality values. 

KEY ISSUES 

The following issues concerning environmental externalities were raised in the direct testimony 

of Mr. Goldsmith. Page citations directly follow all direct quotations from this testimony. 

Environmental Externality Valuation Approaches 

Mr. Goldsmith discusses three primary approaches currently used to value the impacts of 

pollutants: direct impact assessment, shadow pricing (also termed "cost of control") and 

environmental weighting and ranking. 

Direct impact assessment, which provides a dollar-per-pound cost based on actual impacts, is 

recognized as the optimal approach to valuating pollutants costs. However, because it is a data 

intensive and costly process, alternate approaches have been sought. 

Shadow pricing, which measures the costs of incremental increase in pollution control at and 

beyond the cost of either Best Available Control Technology or the most stringent regulation, 

is based on the assumption that incremental control costs can be equated to the incremental cost 

of that pollutant's impact on society and that the higher the control cost, the greater the amount 

of external impact. Although shadow pricing allows a number to be easily derived, this 

methodology does not answer the question of what society should be willing to pay to mitigate 

air pollution. 

Environmental weighting and ranking uses estimates derived through a number of 

methodologies to ascertain the relative impact of a given pollutant on the environment. Although 

a somewhat more subjective approach, it directs the focus to the relative importance of certain 

pollutants within an overall context that permits comparisons with other intrinsic costs and . 

benefits of an alternative supp1y- or demand-side resource. 

Scope of Monetized Environmental Externalities 

Environmental externalities, a subset of the wider externalities universe, "are defined as all the 

costs and benefits not borne by producers or consumers in the course of production or 

consumption. The determination of externalities requires a valuation of both external costs and 

external benefits" [po 4]. 

In practice, the definition of environmental externalities has been narrowed by the few state 

regulatory commissions that have assigned monetized values chiefly to air pollutants emitted by 

electricity generation facilities operated by investor-owned utilities. 

19 
Monetized environmental externalities are mainly assigned on a dollar-per-unit of pollutant

value. "Within this context, the values apply only to externality costs; not to benefits. Not

only is this contrary to the definition of environmental externalities, it precludes a

comprehensive and fair analysis of any environmental externality" [p. 5].

Impacts on DSM Resource Options

"[I]n some jurisdictions, one force in the development of monetized environmental

externalities has been to make demand -side management (DSM) more attractive. By

incorporating externalities on the generation side, DSM alternatives gain an improved

position in the planning process. If externality values are included when a utility calculates

avoided unit cost, the higher the externality value , the higher the avoided costs become.

Higher avoided costs allow DSM to appear more cost-effective and to create a ceiling price

that appears to justify undertaking greater utility incentives, rebates and 'free' measures" [p.

14].

Constraints on Quantification onetization

In the few jurisdictions that have attempted to monetize environmental externalities, the

approaches used are incomplete. In turn, the use of these approaches "could impede rather

than promote environmental improvements and unnecessarily increase the cost of energy

resources to both the customer and to society as a whole" [p. 3].

The electric utility industry has internalized many of the costs associated with air pollutants

and, by definition, these costs are no longer externalities. If such costs are assigned an

externality value, the potential arises for double counting and, in turn, "the degree of

uncertainty surrounding the quantified externality values for air pollutants is increased" [p.

5].

"The current amount and quality of available data [on environmental impacts] do not at this

point in time support the values used in monetization of environmental externalities" [p. 10].

"Areas requiring further review and evaluation before a methodology is adopted for

quantifying or monetizing environmental externalities in the least-cost planning process

include the complexity of the externality universe, the availability and quality of the requisite

data, the potential for fuel bias and the need to account for uncertainty" [p. 4].

Impacts of Quantification onetization

"Overall, the incorporation of monetized environmental externality values into only the price

of electricity for [least-cost] planning purposes:

® can increase the cost of electricity and, by not imposing similar standards on other

energy forms, may distort energy markets;

20

EE-RM-93-801 COMMENT OR12

Monetized environmental externalities are mainly assigned on a dollar-per-unit of pollutant 

value. "Within this context, the values apply only to externality costs; not to benefits. Not 

only is this contrary to the definition of environmental externalities, it precludes a 

comprehensive and fair analysis of any environmental externality" [po 5]. 

Impacts on DSM Resource Options 

"[I]n some jurisdictions, one force in the development of monetized environmental 

externalities has been to make demand-side management (DSM) more attractive. By 

incorporating externalities on the generation side, DSM alternatives gain an improved 

position in the planning process. If externality values are included when a utility calculates 

avoided unit cost, the higher the externality value, the higher the avoided costs become. 

Higher avoided costs allow DSM to appear more cost-effective and to create a ceiling price 

that appears to justify undertaking greater utility incentives, rebates and 'free' measures" [po 

14]. 

Constraints on Quantitication/Monetization 

In the few jurisdictions that have attempted to monetize environmental externalities, the 

approaches used are incomplete. In turn, the use of these approaches "could impede rather 

than promote environmental improvements and unnecessarily increase the cost of energy 

resources to both the customer and to society as a whole" [po 3]. 

The electric utility industry has internalized many of the costs associated with air pollutants 

and, by definition, these costs are no longer externalities. If such costs are assigned an 

externality value, the potential arises for double counting and, in turn, "the degree of 

uncertainty surrounding the quantified externality values for air pollutants is increased" [po 

5]. 

"The current amount and quality of available data [on environmental impacts] do not at this 

point in time support the values used in monetization of environmental externalities" [po 10]. 

"Areas requiring further review and evaluation before a methodology is adopted for 

quantifying or monetizing environmental externaJities in the least-cost planning process 

include the complexity of the externality universe, the availability and quality of the requisite 

data, the potential for fuel bias and the need to account for uncertainty" [po 4]. 

Impacts of Quantification/Monetization 

"Overall, the incorporation of monetized environmental externality values into only the price 

of electricity for [least-cost] planning purposes: 

• can increase the cost of electricity and, by not imposing similar standards on other 

energy forms, may distort energy markets; 

20 
® shifts the focus away from electric end-use technologies, which historically have

provided the greatest energy efficiency gains, and fails to recognize the environmental

impacts of other end-uses;

® impairs the local, domestic and international competitiveness of the U.S. economy by

distorting fuel competition for no environmental benefit;

® heightens the, potential for increased ratepayer costs by biasing the supply planning

process toward higher cost generation; and

® increases overall pollution levels by preventing the balancing of environmental costs

and benefits" [p. 13].

SUPPORTING DOCUMENTATION

None cited.

21

EE-RM-93-801 COMMENT OR12

shifts the focus away from electric end-use technologies, which historically have 

provided the greatest energy efficiency gains, and fails to recognize the environmental 

impacts of other end-uses; 

impairs the local, domestic and international competitiveness of the U.S. economy by 

distorting fuel competition for no environmental benefit; 

heightens the_ potential for increased ratepayer costs by biasing the supply planning 

process toward higher cost generation; and 

increases overall pollution levels by preventing the balancing of environmental costs 

and benefits" [po 13]. 

SUPPORTING DOCUMENTATION 

None cited. 

21 
ALFRED E. KAHN

National Economic Research Associates, Inc.

308 North Cayuga Street

Ithaca, New York 14850

PROFILE

Dr. Kahn is Special Consultant with National Economic Research Associates, Inc. and

Professor of Political Economy Emeritus at Cornell University. The former Chairman of the

New York State Public Service Commission and the Civil Aeronautics Board is the author

of The Economics of Regulation, one of the most respected works on this topic. A member

of the Environmental Advisory Committee of the Federal Energy Administration during the

Ford administration, the distinguished economist had testified in more than 45 state and

federal regulatory commission proceedings.

TESTIMONY REFERENCED

"Rebuttal Testimony of Alfred E. Kahn on Behalf of the Tampa Electric Company that the

Commission Deny Approval to Construct the Proposed Polk Unit One Project," Docket No.

910883-El, November 20, 1991.

STATE REGULATORY ISSUE ADDRESSED

Floridians for Responsible Utility Growth filed a petition requesting the Florida Public

Service Commission to deny approval to the Tampa Electric Company for the construction

of the proposed Polk Unit One Project until the commission directs the utility to aggressively

pursue and acquire more comprehensive demand-side management savings. The proposal

under discussion was presented by Paul Chernick of Resource Insight, Inc.

SUMMARY OF CONCLUSIONS

Although Dr. Kahn espouses energy conservation policies and believes utilities can and

should contribute to the realization of conservation goals, he does not agree that Polk

Project approval should hinge on adoption of a prescribed DSM program. He further

contends that the DSM undertaking as presented by Mr. Chernick is "bad advice, the course

of action he recommends is imprudent and potentially highly injurious to the welfare of

TECO's customers and the Florida Company" [p. 3]. Although environmental externalities

were not directly at issue, Dr. Kahn outlined his general policy recommendations for

factoring environmental costs into resource selection decisions.

22

EE-RM-93-801 COMMENT OR12

PROFILE 

ALFRED E. KAHN 

National Economic Research Associates, Inc. 

308 North Cayuga Street 

Ithaca, New York 14850 

Dr. Kahn is Special Consultant with National Economic Research Associates, Inc. and 

Professor of Political Economy Emeritus at Cornell University. The former Chairman of the 

New York State Public Service Commission and the Civil Aeronautics Board is the author 

of The Economics of Regulation, one of the most respected works on this topic. A member 

of the Environmental Advisory Committee of the Federal Energy Administration during the 

Ford administration, the distinguished economist had testified in more than 45 state and 

federal regulatory commission proceedings. 

TESTIMONY REFERENCED 

"Rebuttal Testimony of Alfred E. Kahn on Behalf of the Tampa Electric Company that the 

Commission Deny Approval to Construct the Proposed Polk Unit One Project," Docket No. 

910883-EI, November 20, 1991. 

STATE REGULATORY ISSUE ADDRESSED 

Floridians for Responsible Utility Growth filed a petition requesting the Florida Public 

Service Commission to deny approval to the Tampa Electric Company for the construction 

of the proposed Polk Unit One Project until the commission directs the utility to aggressively 

pursue and acquire more comprehensive demand-side management savings. The proposal 

under discussion was presented by Paul Chernick of Resource Insight, Inc. 

SUMMARY OF CONCLUSIONS 

Although Dr. Kahn espouses energy conservation policies and believes utilities can and 

should contribute to the realization of conservation goals, he does not agree that Polk 

Project approval should hinge on adoption of a prescribed DSM program. He further 

contends that the DSM undertaking as presented by Mr. Chernick is "bad advice, the course 

of action he recommends is imprudent and potentially highly injurious to the welfare of 

TECO's customers and the Florida Company" [po 3]. Although environmental externalities 

were not directly at issue, Dr. Kahn outlined his general policy recommendations for 

factoring environmental costs into resource selection decisions. 

22 
ISSUES

The following issues concerning environmental externalities were raised in the rebuttal

testimony of Dr. Kahn. Page citations directly follow all direct quotations from this

testimony.

Environmental Externalities Policy Options

In addressing the influence of environmental costs in regulatory requirements for ISM

implementation, Dr. Kahn focuses on several general policy directions.

"Environmental costs should in principle be factored into choices among alternative supply

and demand-side options" [p. 20].

Institutional devices should be identified for: "(a) determining those external costs, not

already internalized by existing environmental regulation, (b) deciding to what extent it is in

the interest of the people of Florida to recognize them in fuel choice and conservation

decisions, and (c) seeing to it that they do indeed get reckoned into those decisions" [p. 20].

Resource use for the prevention or, mitigation of environmental damage must be taken into

account. This requires a balancing of the "costs of additional protections, over and above

those already mandated, against the benefits" [p. 20].'

Appropriateness of State PUC-Imposed Values

"Environmental costs are of course real costs; and some agency, at some level of

government, must take them into account. But state public utility regulatory commissions

must bear in mind the inherent, high probability of distortions and inefficiencies if they

impose on only the companies subject to their jurisdiction environmental costs greater than

they are already forced to bear under statewide and nationwide environmental controls,

merely because they happen to be regulating them already -- for entirely different reasons -

- while imposing no controls on their unregulated competitors or customers of their

competitors" [p. 19].

Potential PUC Conflicts

In deciding how much of uninternalized regional, national or global environmental costs to

impose on the state economy and its residents, the PUC "must pay heed to the dangers of

piecemeal environmentalism" [p. 21].

Imposing environmental costs on electric utilities and not on non-utility entities whose

activities give rise to environmental costs "will inevitably tend to inefficiently distort the

choice between them. It could even, by raising the price of electricity while leaving

unaffected the direct consumption of fossil fuels at the point of use, impede the process of

23

EE-RM-93-801 COMMENT OR12

KEY ISSUES 

The fonowing issues concerning environmental externalities were raised in the rebuttal 

testimony of Dr. Kahn. Page citations directly follow an direct quotations from this 

testimony. 

Environmental Externalities Policy Options 

In addressing the influence of environmental costs in regulatory requirements for DSM 

implementation, Dr. Kahn focuses on several general policy directions. 

"Environmental costs should in principle be factored into choices among alternative supply 

and demand-side options" [po 20]. 

Institutional devices should be identified for: "( a) determining those external costs, not 

already internalized by existing environmental regulation, (b) deciding to what extent it is in 

the interest of the people of Florida to recognize them in fuel choice· and conservation 

decisions, and (c) seeing to it that they do indeed get reckoned into those decisions" [po 20]. 

Resource use for the prevention or, mitigation of environmental damage must be taken into 

account. This requires a balancing of the "costs of additional protections, over and above 

those already mandated, against the benefits" [po 20]. 

Appropriateness of State PUC-Imposed Values 

"Environmental costs are of course real costs; and some agency, at some level of 

government, must take them into account. But state public utility regulatory commissions 

must bear in mind the inherent, high probability of distortions and inefficiencies if they 

impose on only the companies subject to their jurisdiction environmental costs greater than 

they are already forced to bear under statewide and nationwide environmental controls, 

merely because they happen to be regulating them already -- for entirely different reasons -

- while imposing no controls on their unregulated competitors or customers of their 

competitors" [po 19]. 

Potential PUC Conflicts 

In deciding how much of uninternalized regional, national or global environmental costs to 

impose on the state economy and its residents, the PUC "must pay heed to the dangers of 

piecemeal environmentalism" [po 21]. 

Imposing environmental costs on electric utilities and not on non-utility entities whose 

activities give rise to environmental costs "will inevitably tend to inefficiently distort the 

choice between them. It could even, by raising the price of electricity while leaving 

unaffected the direct consumption of fossil fuels at the point of use, impede the process of 

23 
electrification" [p. 21], which has been instrumental in conserving energy and mitigating

environmental damage.

SUPPORTING DOCUMENTATION

The following were cited in the author's discussion of externalities.

Schurr, Sam H., Calvin C. Burwell, Warren D. Devine, Jr. and Sidney Sonenblum. Electricity

in the American Economy Agent of Technological Progress. New York: Greenwood Press,

1990.

Mills, Mark P., Ecowatts: The Clean Switch, Using Electricity to Save Energy and Cut

Greenhouse Gases. Chevy Chase, MD: Science Concepts, Inc., April 1991.

24

EE-RM-93-801 COMMENT OR12

electrificationll [po 21], which has been instrumental in conserving energy and mitigating 

environmental damage. 

SUPPORTING DOCUMENTATION 

The following were cited in the author's discussion of externalities. 

Schurr, Sam H., Calvin C. Burwell, Warren D. Devine, Jr. and Sidney Sonenblum. Electricity 

in the American Economy Agent of Technological Progress. New York: Greenwood Press, 

1990. 

Mills, Mark P., Ecowatts: The Clean Switch, Using Electricity to Save Energy and Cut 

Greenhouse Gases. Chevy Chase, MD: Science Concepts, Inc., April 1991. 

24 
ROBERT H. KOPPE

RCG/Hagler Bailly, Inc.

P.O. Drawer 0

Boulder, Colorado 80306

PROFILE

Mr. Koppe is a Vice President of RCG/Hagler Bailly, Inc. and Manager of the Stoller Power

Division. Prior to joining the consulting firm, he managed the Nuclear Engineering Division

for Consolidated Edison Company of New York. An engineer, Mr. Koppe has testified as

an expert witness in a number of state regulatory proceedings.

TESTIMONY REFERENCED

"Testimony of Robert H. Koppe on Behalf of the Massachusetts Electric Company in the

Investigation by the Department on its Own Motion as to the Environmental Externality

Values to be Used in Resource Cost-Effectiveness Tests by Electric Companies Subject to

the Department's Jurisdiction," Massachusetts Department of Public Utilities Docket No.

D.P.U. 91-131, May 16, 1991.

STATE REGULATORY ISSUE ADDRESSED

As directed in D.P.U. Order No. 89-239, specific values for eight air pollutants are to be

used in all electric utility resource plans unless it can be demonstrated that other values are

more reasonable. This subsequent docket is intended to investigate such other values.

SUMMARY OF CONCLUSIONS

Mr. Koppe presents a market-based set of environmental externality values for NOX, SOX,

VOCs, TSPs, CO, C021 CH4 and N20 developed under a contract he managed. The

methodology is detailed in the "Final Report on Environmental Externality Valuation"

prepared for New England Power Service Company and submitted as an exhibit to Mr.

Koppe's testimony.

ISSUES

The following issues concerning environmental externalities were raised in the direct

testimony of Robert H. Koppe. Page citations directly follow all direct quotations from this

testimony.

25

EE-RM-93-801 COMMENT OR12

PROFILE 

ROBERT H. KOPPE 

RCG/Hagler Bailly, Inc. 

P.O. Drawer 0 

Boulder, Colorado 80306 

Mr. Koppe is a Vice President of RCG/Hagler Bailly, Inc. and Manager of the Stoller Power 

Division. Prior to joining the consulting firm, he managed the Nuclear Engineering Division 

for Consolidated Edison Company of New York. An engineer, Mr. Koppe has testified as 

an expert witness in a number of state regulatory proceedings. 

TESTIMONY REFERENCED 

"Testimony of Robert H. Koppe on Behalf of the Massachusetts Electric Company in the 

Investigation by the Department on its Own Motion as to the Environmental Externality 

Values to be Used in Resource Cost-Effectiveness Tests by Electric Companies Subject to 

the Department's Jurisdiction," Massachusetts Department of Public Utilities Docket No. 

D.P.U. 91-131, May 16, 1991. 

STATE REGULATORY ISSUE ADDRESSED 

As directed in D.P.U. Order No. 89-239, specific values for eight air pollutants are to be 

used in all electric utility resource plans unless it can be demonstrated that other values are 

more reasonable. This subsequent docket is intended to investigate such other values. 

SUMMARY OF CONCLUSIONS 

Mr. Koppe presents a market-based set of environmental externality values for NOx' SOx, 

VOCs, TSPs, CO, CO2, CH4 and N20 developed under a contract he managed. The 

methodology is detailed in the ItPinal Report on Environmental Externality Valuation" 

prepared for New England Power Service Company and submitted as an exhibit to Mr. 

Koppe's testimony. 

KEY ISSUES 

The following issues concerning environmental externalities were raised in the direct 

testimony of Robert H. Koppe. Page citations directly follow all direct quotations from this 

testimony. 

25 
Environmental Externality Valuation Approaches

The following describes the methodology used to develop monetized costs for the

environmental externalities of air pollutants listed in I.P.U. Order 89-239.

For SOX, the market price "estimated to result from the emissions trading provisions

of the 1990 Clean Air Act Amendments" [p. 1] is used.

For CO2, the monetized value for greenhouse gases developed by Dr. Nordhaus and

adopted in I.P.U. Order 89-239 is used.

For the remaining six pollutants, "the value for obtaining offsets based on the cost of

controlling a broad array of stationary sources of emissions" [p. 2] is estimated.

The table on the following page contains the values recommended by RCG/Hagler Bailly

and those adopted in the earlier D.P.U. Order.

SUPPORTING DOCUMENTATION

Although no full citations are listed in the testimony, the final report submitted as an exhibit

contains a number of references.

26

EE-RM-93-801 COMMENT OR12

Environmental Externality Valuation Approaches 

The following describes the methodology used to develop monetized costs for the 

environmental externalities of air pollutants listed in D.P.V. Order 89-239. 

• For SOx, the market price "estimated to result from the emissions trading provisions 

of the 1990 Clean Air Act Amendments" [po 1] is used. 

• For CO2, the monetized value for greenhouse gases developed by Dr. Nordhaus and 

adopted in D.P.V. Order 89-239 is used. 

For the remaining six pollutants, lithe value for obtaining offsets based on the cost of 

controlling a broad array of stationary sources of emissions" [po 2] is estimated. 

The table on the following page contains the values recommended by RCG/Hagler Bailly 

and those adopted in the earlier D.P.V. Order. 

SUPPORTING DOCUMENTATION 

Although no full citations are listed in the testimony, the final report submitted as an exhibit 

contains a number of references. 

26 
ROBERT H. KOPPE

SUMMARY OF ENVIRONMENTAL EXTERNALITY VALUES'

FOR ENERGY RESOURCE OPTIONS

Nitrogen Oxides (NOX)

- ambient air quality

- greenhouse

$6,5002

0

$200

0

- total $6,500 $200

Sulfur Oxides (SOX) $1,500 $600

Volatile Organic Compounds (VOCs) $5,300 $200 - $300

Total Suspended Particles (TSPs) $4,000 $300

Carbon Monoxide (CO)

- ambient air quality

- greenhouse

$820

50

$10

- total $870 $10

Carbon Dioxide (C02) $22

Methane (CH4) $220

Nitrous Oxide (N20) $3,960

1

2

DOER estimates (DOER Comments Update, 4/18) based on estimates prepared by

Bernow and Marron, Valuation of Environmental Externalities for Energy Planning and

Operations, May 1990 Update, Tellus Institute, May 18, 1990.

For NOX externality estimates, the summary table on page 33 of the above mentioned

study contained a typographical error. The corrected value that appears in this

Order was taken from pages 11 and 12 of the above-mentioned study.

27

EE-RM-93-801 COMMENT OR12

1 

2 

ROBERT H. KOPPE 

SUMMARY OF ENVIRONMENTAL EXTERNALITY VALUESl 

FOR ENERGY RESOURCE OPTIONS 

Nitrogen Oxides (NOx) 

- ambient air quality $6,5002 

- greenhouse 0 

- total $6,500 

Sulfur Oxides (SOx) $1,500 

$200 

0 

$200 

$600 

Volatile OrganiC Compounds (VOCs) $5,300 $200 - $300 

Total Suspended Particles (TSPs) $4,000 $300 

Carbon Monoxide (CO) 

- ambient air quality $820 $10 

- greenhouse 50 -- -- - total $870 $10 

Carbon Dioxide (CO2) $22 

Methane (CH4) $220 

Nitrous Oxide (N2O) $3,960 

DOER estimates (DOER Comments Update, 4/18) based on estimates prepared by 

Bernow and Marron, Valuation of Environmental Externalities for Energy Planning and 

Operations, May 1990 Update, Tellus Institute, May 18, 1990. 

For NOx externality estimates, the summary table on page 33 of the above mentioned 

study contained a typographical error. The corrected value that appears in this 

Order was taken from pages 11 and 12 of the above-mentioned study. 

27 
LESTER B. LAVE

Carnegie-Mellon University

Graduate School of Industrial Administration

Schehley Park

Pittsburgh, Pennsylvania 15213

PROFILE

Dr. Lave is James Higgins Professor of Economics and Professor of Engineering and Public

Policy at Carnegie-Mellon University. At the Brookings Institute, he headed the Economics

Department and served as a Senior Fellow. He has conducted research on the economics

of energy, the environment and health and safety, and has previously testified on

environmental issues. The former President of the Society for Risk Analysis also has

consulted with many federal agencies and corporations , taught at several major universities,

and served on a number of national science and engineering committee.

TESTIMONY REFERENCED

"Testimony of Lester B. Lave on Behalf of Western Massachusetts Electric Company,

Massachusetts Electric Company and Boston Edison Company in the Investigation by the

Department on its own Motion as to the Environmental Externality Values to be Used in

Resource Cost-Effectiveness Tests by Electric Companies Subject to the Department's

Jurisdiction," Massachusetts Department of Public Utilities Docket No. D.P.U. 91-131,

October 4, 1991.

STATE REGULATORY ISSUE ADDRESSED

The Department of Public Utilities is considering estimates of external environmental costs

to be utilized by electric utilities in the integrated resource management process.

SUMMARY OF CONCLUSIONS

Dr. Lave concludes that externality costs should be based on the marginal benefit of

abatement and the current costs adopted by the D.P.U. will increase abatement expenditures

needlessly and could lower environmental quality. He presents his "best" and "high"

estimates of the marginal benefits of abating criteria air pollutants and carbon dioxide. Even

though uncertainties exist, Dr. Lave contends these estimates reflect the best available

scientific data and should be adopted by the D.P.U.

28

EE-RM-93-801 COMMENT OR12

PROFILE 

LESTER B. LAVE 

Carnegie.Mellon University 

Graduate School of Industrial Administration 

Schenley Park 

Pittsburgh, Pennsylvania 15213 

Dr. Lave is James Higgins Professor of Economics and Professor of Engineering and Public 

Policy at Carnegie-Mellon University. At the Brookings Institute, he headed the Economics 

Department and served as a Senior Fellow. He has conducted research on the economics 

of energy, the environment and health and safety, and has previously testified on 

environmental issues. The former President of the Society for Risk Analysis also has 

consulted with many federal agencies and corporations, taught at several major universities, 

and served on a number of national science and engineering committee. 

TESTIMONY REFERENCED 

"Testimony of Lester B. Lave on Behalf of Western Massachusetts Electric Company, 

Massachusetts Electric Company and Boston Edison Company in the Investigation by the 

Department on its own Motion as to the Environmental Externality Values to be Used in 

Resource Cost-Effectiveness Tests by Electric Companies Subject to the Department's 

Jurisdiction," Massachusetts Department of Public Utilities Docket No. D.P.U. 91-131, 

October 4, 1991. 

STATE REGULATORY ISSUE ADDRESSED 

The Department of Public Utilities is considering estimates of external environmental costs 

to be utilized by electric utilities in the integrated resource management process. 

SUMMARY OF CONCLUSIONS 

Dr. Lave concludes that externality costs should be based on the marginal benefit of 

abatement and the current costs adopted by the D.P.U. will increase abatement expenditures 

needlessly and could lower environmental quality. He presents his "best" and "high" 

estimates of the marginal benefits of abating criteria air pollutants and carbon dioxide. Even 

though uncertainties exist, Dr. Lave contends these estimates reflect the best available 

scientific data and should be adopted by the D.P.U. 

28 
ISSUES

The following issues concerning environmental externalities were raised in the direct

testimony of Dr. Lave. Page citations directly follow all direct quotations from this

testimony.

Environmental Externality Policy Options

"Precise estimates are not available for many of the health and environmental effects of

specific discharges or particular electricity generation techniques [and] uncertainties pervade

the estimates that are available" [p. 11]. Consequently, "federal regulators face the choice

of waiting for years, possibly decades, until definitive data are available, or making decisions

on the basis of currently available data, which sometimes is misleading" [p.12].

Environmental Externality Valuation Approaches

"Externality prices must be based on the marginal benefit of abatement... the current D.P.U.

[cost of control] prices will increase abatement expenditures needlessly and possibly lower

environmental quality" [p.4].

Marginal benefit of abatement provides better estimates of externality valuations than

marginal cost approaches such as contingent valuation, cost of repair and lost wages, land

values, lost output or cost of repair or replacement. Marginal benefit of abatement is

focused on the health impacts of improving air quality such as fewer premature deaths,

disability days, asthma attacks, cancers and coughs, as well as the non-health effects such as

better visibility, less damage to materials and vegetation and improvements in other social

welfare effects.

"I find it ludicrous that someone can argue that the current marginal cost of control can be

used as a good surrogate for the marginal benefit of control" [p. 10]. Marginal cost of

control methods, such as those used by the Tellus Institute for assigning monetized

environmental externalities, are inappropriate for a number of reasons.

The assertion "that the marginal benefit of abatement can be inferred from the

marginal cost of abatement fails to recognize the structure of the Clean Air Act or

EPA's procedures for setting emissions standards. The marginal costs of abatement

should be expected to span a wide range, with most being above the marginal benefit

of abatement" [p. 10].

The estimates differ across sources for the same pollutant and therefore cannot

reveal anything about society's preferences.

Legislated emission levels upon which cost of control estimates are based do not

consider optimizing social welfare. "The current process for setting emissions

standards is so fraught with internal inconsistencies and ad hoc decisions and so

29

EE-RM-93-801 COMMENT OR12

KEY ISSUES 

The following issues concerning environmental externalities were raised in the direct 

testimony of Dr. Lave. Page citations directly follow all direct quotations from this 

testimony. 

Environmental Externality Policy Options 

"Precise estimates are not available for many of the health and environmental effects of 

specific discharges or particular electricity generation techniques [and] uncertainties pervade 

the estimates that are available" [po 11]. Consequently, "federal regulators face the choice 

of waiting for years, possibly decades, until definitive data are available, or making decisions 

on the basis of currently available data, which sometimes is misleading" [p.12]. 

Environmental Externality Valuation Approaches 

"Externality prices must be based on the marginal benefit of abatement ... the current D.P.U. 

[cost of control] prices will increase abatement expenditures needlessly and possibly lower 

environmental quality" [pAl. 

Marginal benefit of abatement provides better estimates of externality valuations than 

marginal cost approaches such as contingent valuation, cost of repair and lost wages, land 

values, lost output or cost of repair or replacement. Marginal benefit of abatement is 

focused on the health impacts of improving air quality such as fewer premature deaths, 

disability days, asthma attacks, cancers and coughs, as well as the non-health effects such as 

better visibility, less damage to materials and vegetation and improvements in other social 

welfare effects. 

"I find it ludicrous that someone can argue that the current marginal cost of control can be ' 

used as a good surrogate for the marginal benefit of control" [po 10]. Marginal cost of , 

control methods, such as those used by the Tellus Institute for assigning monetized 

environmental externalities, are inappropriate for a number of reasons. 

e The assertion "that the marginal benefit of abatement can be inferred from the 

marginal cost of abatement fails to recognize the structure of the Clean Air Act or 

EPA's procedures for setting emissions standards. The marginal costs of abatement 

should be expected to span a wide range, with most being above the marginal benefit 

of abatement" [po 10]. 

The estimates differ across sources for the same pollutant and therefore cannot 

reveal anything about society's preferences. 

Legislated emission levels upon which cost of control estimates are based do not 

consider optimizing social welfare. "The current process for setting emissions 

standards is so fraught with internal inconsistencies and ad hoc decisions and so 

29 
bereft of analysis or considerations of social marginal cost and marginal benefit that

it is hard to credit any argument about this selection optimizing anything, save

possibly temporary political gain"[p.9].

Accepting marginal cost of control as a good proxy for marginal benefit involves the

logical inconsistency that things are already optimal and that further changes to

emission standards will only make things worse.

Environmental Externality Valuations

Since "we found that the relationship between air pollution and health was not statistically

significant for areas attaining the primary air quality standards"[p.27], zero values are

assigned as the best estimate of the direct health related impacts of all emissions except

those incurred indirectly through ozone.

Best estimates and high estimates of externality values associated with particular emissions

are given. High estimates "reflect the large amount of uncertainty" [p. 3 8]. High values for

SO2 are derived by assuming the marginal benefit of abatement in an attainment area is

equal to 10 percent of the marginal benefit of attainment in a highly polluted area. "High

values for other emissions are derived from the Southern California estimates using high

values for the social cost of each of the health effects" [p. 38].

Dr. Lave's estimates for the marginal benefit of abating each emission are summarized in

the following table.

Interim CO2 Externality Values

There is a great deal of uncertainty with respect to the extent of global warming and its

effects on human health and wildlife. "Abatement action, if warranted, should await at least

a partial resolution of uncertainty" [p.40]. Dr. Lave recommends the use of the externality

values developed by Professor William Nordhaus of $2 to $10 per ton.

30

EE-RM-93-801 COMMENT OR12

bereft of analysis or considerations of social marginal cost and marginal benefit that 

it is hard to credit any argument about this selection optimizing anything, save 

possibly temporary political gain"[p.9]. 

Accepting marginal cost of control as a good proxy for marginal benefit involves the 

logical inconsistency that things are already optimal and that further changes to 

emission standards will only make things worse. 

Environmental Externality Valuations 

Since "we found that the relationship between air pollution and health was not statistically 

significant for areas attaining the primary air quality standards"[p.27], zero values are 

assigned as the best estimate of the direct health related impacts of all emissions except 

those incurred indirectly through ozone. 

Best estimates and high estimates of externality values associated with particular emissions 

are given. High estimates "reflect the large amount of uncertainty"[p.38]. High values for 

S02 are derived by assuming the marginal benefit of abatement in an attainment area is 

equal to 10 percent of the marginal benefit of attainment in a highly polluted area. "High 

values for other emissions are derived from the Southern California estimates using high 

values for the social cost of each of the health effects" [po 38]. 

Dr. Lave's estimates for the marginal benefit of abating each emission are summarized in 

the following table. 

Interim CO2 Externality Values 

There is a great deal of uncertainty with respect to the extent of global warming and its 

effects on human health and wildlife. "Abatement action, if warranted, should await at least 

a partial resolution of uncertainty" [p.40]. Dr. Lave recommends the use of the externality 

values developed by Professor William Nordhaus of $2 to $10 per ton. 

30 
DR. LESTER LAVE

ESTIMATES OF EXTERNALITY VALUES PER TON FOR MASSACHUSETTS

SO2 Health $ N $ 800

Visibility 10 40

Other 50 150

Total $ 60 $ 990

PM10 Health $ N $1,100

Visibility 100 400

Total $ 100 $1,500

NO2 Direct Health $ N $ N

Via Ozone 50 400

Other 20 50

Total $ 70 $ 450

VOC Direct Health $ N $ N

Via Ozone 580 1,700

Other 20 100

Total $ 600 $1,800

CO Health N N

CO2 2 10

N = Negligible

Appropriateness of State PUC-unposed Values

Although dollar values are the appropriate measure of marginal benefits, state regulators

"will have to be highly selective and careful in determining how to monetize environmental

externalities and how it uses these dollar estimates" [p. 8].

Given the current federal and state command and control system of environmental

regulation, PUCs "will find it difficult to improve environmental quality while lowering cost,

rather than adding another inefficiency and another layer of red tape" [p. 8]. PUCs must

be aware that applying artificially high estimates, such as those derived under a cost of

control methodology, "will be costly to society. It will lead to unwarranted emissions control

expenditures or to choosing an inappropriate technology. If the prices lead to choosing the

wrong technology, they could increase health and environmental damages" [pp. 43-44].

SUPPORTING DOCUMENTATTON

None fully cited.

31

EE-RM-93-801 COMMENT OR12

DR. LESTER LAVE 

ESTIMATES OF EXTERNALITY VALUES PER TON FOR MASSACHUSETTS 

Health $ N $ 800 

Visibility 10 40 

Other --.2Q ~ 

Total $ 60 $ 990 

PMlO Health $ N $1,100 

Visibility --1QQ -.1QQ 

Total $ 100 $1,500 

Direct Health $ N $ N 

Via Ozone 50 400 

Other --.1Q ~ Total $ 70 $ 450 

VOC Direct Health $ N $ N 

Via Ozone 580 1,700 

Other --.1Q --1QQ 

Total $ 600 $1,800 

CO Health N N 

2 10 

N = Negligible 

Appropriateness of State PUC-imposed Values 

Although dollar values are the appropriate measure of marginal benefits, state regulators 

"will have to be highly selective and careful in determining how to monetize environmental 

externalities and how it uses these dollar estimates" [po 8]. 

Given the current federal and state command and control system of environmental 

regulation, PUCs "will find it difficult to improve environmental quality while lowering cost, 

rather than adding another inefficiency and another layer of red tape" [po 8]. PUCs must 

be aware that applying artificially high estimates, such as those derived under a cost of 

control methodology, "will be costly to society. It will lead to unwarranted emissions control 

expenditures or to choosing an inappropriate technology. If the prices lead to choosing the 

wrong technology, they could increase health and environmental damages" [pp. 43-44]. 

SUPPORTING DOCUMENTATION 

None fully cited. 

31 
market price of the allowances also makes the economic impact on society difficult to

predict.

It is this approach that Dr. Lester recommends as an alternative to the monetized approach

adopted by the Massachusetts D.P.U. In essence, the approach developed for SO2 under

the federal Clean Air Act Amendments would be emulated for the air pollutants covered

under the current state agency policy.

Emission taxes are levied on specific pollutant emissions so as to reduce the economic

viability of the polluting energy source. Alternately, tax credits may be granted for

non-polluting energy sources or rebates issued for qualifying new equipment or facilities

purchases. Although pollution taxes provide control over economic impacts and, in

principle, are cost-effective, the tax level should be set in accordance with the associated

environmental costs. And, knowledge of these costs is frequently lacking. Furthermore, the

resultant emissions reductions are difficult to predict.

Scope of Monetized Environmental Externalities

Environmental externality costs are applied only in the selection process for new electric

power sources. The exclusion of existing power plants greatly curtails the environmental

benefits realized in all but the very long term; "in effect, it only makes environmental

adjustments to the long-run marginal cost of supply" [p. 15] and may actually precipitate

negative environmental impacts. Short-term decisions on the use of existing generating

capacity are unaffected. By effectively increasing the cost only of new capacity additions, this

approach "creates a bias against the replacement of existing capital stock, where the

principal environmental gains are to be had" [p. 18].

Environmental Dispatch

A system-wide approach to utilizing existing capacity, not the modification of new resource

decisions, is the key to cost-effective emissions reductions. "Environmental quality will

actually decline if, for example, the selection of a DSM resource ahead of a new,

low-emissions generating unit as a result of considering externalities leads to continued or

even increased dispatch of a much dirtier existing unit on the system" [p. 17]. However,

even if existing plants were also included in a monetized environmental externality approach,

the policy would still fail to address other in-state sources of the same pollutants. In so

doing, "the piecemeal nature of the (state) regulatory regime would seriously distort the

outcome" [p.18].

Zero Externality Values

The application of an externality value to residual SO2 emissions from new resources is

made redundant by the 1990 Amendments to the Clean Air Act and should be completely

34

EE-RM-93-801 COMMENT OR12

market price of the allowances also makes the economic impact on society difficult to 

predict. 

It is this approach that Dr. Lester recommends as an alternative to the monetized approach 

adopted by the Massachusetts D.P.U. In essence, the approach developed for S02 under 

the federal Clean Air Act Amendments would be emulated for the air pollutants covered 

under the current state agency policy. 

Emission taxes are levied on specific pollutant emissions so as to reduce the economic 

viability of the polluting energy source. Alternately, tax credits may be granted for 

non-polluting energy sources or rebates issued for qualifying new equipment or facilities 

purchases. Although pollution taxes provide control over economic impacts and, in 

principle, are cost-effective, the tax level should be set in accordance with the associated 

environmental costs. And, knowledge of these costs is frequently lacking. Furthermore, the 

resultant emissions reductions are difficult to predict. 

Scope of Monetized Environmental Externalities 

Environmental externality costs are applied only in the selection process for new electric 

power sources. The exclusion of existing power plants greatly curtails the environmental 

benefits realized in all but the very long term; lIin effect, it only makes environmental 

adjustments to the long-run marginal cost of supplyll [po 15] and may actually precipitate 

negative environmental impacts. Short-term decisions on the use of existing generating 

capacity are unaffected. By effectively increasing the cost only of new capacity additions, this 

approach IIcreates a bias against the replacement of existing capital stock, where the 

principal environmental gains are to be had II [po 18]. 

Environmental Dispatch 

A system-wide approach to utilizing existing capacity, not the modification of new resource 

decisions, is the key to cost-effective emissions reductions. "Environmental quality will 

actually decline if, for example, the selection of a DSM resource ahead of a new, 

low-emissions generating unit as a result of considering externalities leads to continued or 

even increased dispatch of a much dirtier existing unit on the systemll [po 17]. However, 

even if existing plants were also included in a monetized environmental externality approach, 

the policy would still fail to address other in-state sources of the same pollutants. In so 

doing, lithe piecemeal nature of the (state) regulatory regime would seriously distort the 

outcomell [p.18]. 

Zero Externality Values 

The application of an externality value to residual S02 emissions from new resources is 

made redundant by the 1990 Amendments to the Clean Air Act and should be completely 

34 
eliminated. The social cost of residual SO2 emissions is internalized under the federal

legislation and any additional externality cost would amount to double counting.

The use of marginal cost of control to estimate an externality value for carbon dioxide raises

a fundamental problem: no regulations curbing CO2 emissions have yet been enacted. "The

inferred externality value under present conditions must therefore be zero. Until [regulatory

action is taken], there can be no grounds for applying the cost of control method because

there is no basis for choosing one control technology over any another for the purposes of

pricing the externality" [p. 37].

Interim CO2 Externality Values

Given the major uncertainties surrounding the climatological consequences of different

greenhouse gas emissions rates and the economic impacts of climate change, only a very

crude balancing of costs and benefits can now be made. The United States could set a goal

of maintaining aggregate emissions at their current levels by the year 2000. A carbon tax

could be imposed on all primary fuels to maintain CO2 emissions at 1990 levels.

Due to the inaction of the federal government and most states, the effectiveness of unilateral

action on CO2 by any single state is limited . Therefore, a discount factor of 50 percent could

be applied to the tax schedule developed by Harvard economists Dale Jorgenson and Peter

Wilcoxen. This would set at a rate of 10 cents per ton of CO2 in the first year ( 1991) and

increased initially by about the same amount until the rate stabilized at $2.30 per ton after

the year 2020. Regardless of the actual value selected, the state D.P.U. should permit plant

owners to reduce their effective CO2 emissions through the purchase of greenhouse gas

offsets (e.g., recycling CFCs from obsolete automobile air conditioners, collecting methane

now vented from coal mines or landfills and the using demand-side management measures

to reduce fossil fuel consumption).

Fuel Switching

If consideration of environmental externality costs significantly adds to the price of electricity,

consumers will be motivated to substitute for non-electric sources upon which externality

costs have not been imposed. In turn, these may be more polluting sources that would

defeat the very intent of the policy.

Appropriateness of State PUC-imposed Values

In principle, state regulatory action is appropriate only when the environmental impacts are

primary local. This is not the case for the many pollutants emitted from electric power

plants that extend beyond state boundaries. Unless environmental cost adders are widely

adopted across state jurisdictions, individual state PUC action will place an additional

economic burden on residents of that state, create a competitive disadvantage for industry

housed in that state and stimulate the relocation of business and power producer operations.

35

EE-RM-93-801 COMMENT OR12

eliminated. The social cost of residual S02 emissions is internalized under the federal 

legislation and any additional externality cost would amount to double counting. 

The use of marginal cost of control to estimate an externality value for carbon dioxide raises 

a fundamental problem: no regulations curbing CO2 emissions have yet been enacted. liThe 

inferred externality value under present conditions must therefore be zero. Until [regulatory 

action is taken], there can be no grounds for applying the cost of control method because 

there is no basis for choosing one control technology over any another for the purposes of 

pricing the externality" [po 37]. 

Interim CO2 Externality Values 

Given the major uncertainties surrounding the climatological consequences of different 

greenhouse gas emissions rates and the economic impacts of climate change, only a very 

crude balancing of costs and benefits can now be made. The United States could set a goal 

of maintaining aggregate emissions at their current levels by the year 2000. A carbon tax 

could be imposed on all primary fuels to maintain CO2 emissions at 1990 levels. 

Due to the inaction of the federal government and most states, the effectiveness of unilateral 

action on CO2 by any single state is limited. Therefore, a discount factor of 50 percent could 

be applied to the tax schedule developed by Harvard economists Dale Jorgenson and Peter 

Wilcoxen. This would set at a rate of 10 cents per ton of CO2 in the first year (1991) and 

increased initially by about the same amount until the rate stabilized at $2.30 per ton after 

the year 2020. Regardless of the actual value selected, the state D.P.U. should permit plant 

owners to reduce their effective CO2 emissions through the purchase of greenhouse gas 

offsets (e.g., recycling CFCs from obsolete automobile air conditioners, collecting methane 

now vented from coal mines or landfills and the using demand-side management measures 

to reduce fossil fuel consumption). 

Fuel Switching 

If consideration of environmental externality costs significantly adds to the price of electricity, 

consumers will be motivated to substitute for non-electric sources upon which externality 

costs have not been imposed. In turn, these may be more polluting sources that would 

defeat the very intent of the policy. 

Appropriateness of State PUC-imposed Values 

In principle, state regulatory action is appropriate only when the environmental impacts are 

primary local. This is not the case for the many pollutants emitted from electric power 

plants that extend beyond state boundaries. Unless environmental cost adders are widely 

adopted across state jurisdictions, individual state PUC action will place an additional 

economic burden on residents of that state, create a competitive disadvantage for industry 

housed in that state and stimulate the relocation of business and power producer operations. 

35 
Ultimately, these ratepayers will not reap the full environmental benefits of their increased

expenditures.

This situation is exacerbated by the inability to differentiate among sources anywhere in the

world of certain pollutants. In the case of carbon dioxide, this dictates the imposition of

environmental cost adders at the global level. For pollutants like sulfur dioxide,

implementation should be at the regional or national level.

Potential PUC Conflicts/Disadvantages

Factoring environmental costs of electricity generation into production costs is a "clear

departure from the historical mission of utility commissions, and is potentially in conflict with

that mission" [p. 23] -- protecting consumers against monopolistic exploitation by ensuring

utilities provide reliable service at the lowest possible cost. Conversely, externalities is an

environmental protection policy that increases ratepayer costs.

"In implementing this policy, the (PUC) is implicitly making a trade-off between the

economic well-being of the (state's) ratepayers and the perceived environmental well-being

of out-of-state residents" [p. 25]. Furthermore, the state regulatory agency is assuming

responsibilities that continue to rest with environmental agencies. In turn, this creates a need

for administrative capabilities within PUCs that are essentially duplicative of those held by

other state agencies.

A third potential consequence of this co-mingling of institutional functions could be

increased electricity prices to achieve environmental goals. Given that the power to regulate

is the power to tax, lifting the obligation to hold rates to a minimum would remove "a

principle barrier to its irresponsible exercise" [p. 26]. Furthermore, the introduction of

environmental externalities into the IRM process creates "additional opportunities for

advocates of specific environmental goals to achieve their objectives, irrespective of whether

a broad political or scientific consensus... has been reached" [p.29].

SUPPORTING DOCUMENTATION

Andrews, Clinton J. and Stephen R. Connors. "Existing Capacity -- The Key to Reducing

Emissions." MIT Energy Laboratory, 17 May 1991 (draft).

Andrews, Clinton J. "The Marginality of Regulating Marginal Investments," 11 June 1991

(forthcoming in Energy Policy).

Jorgenson, Dale and Peter Wilcoxen. "Reducing U.S. Carbon Dioxide Emissions: The Cost

of Different Goals." Department of Economics, Harvard University, December 1990

(mimeo).

Kahn, Alfred. Wall Street Journal, 7 August 1991.

36

EE-RM-93-801 COMMENT OR12

Ultimately, these ratepayers will not reap the full environmental benefits of their increased 

expenditures. 

This situation is exacerbated by the inability to differentiate among sources anywhere in the 

world of certain pollutants. In the case of carbon dioxide, this dictates the imposition of 

environmental cost adders at the global level. For pollutants like sulfur dioxide, 

implementation should be at the regional or national level. 

Potential PUC Conflicts/Disadvantages 

Factoring environmental costs of electricity generation into production costs is a "clear 

departure from the historical mission of utility commissions, and is potentially in conflict with 

that mission" [po 23] -- protecting consumers against monopolistic exploitation by ensuring 

utilities provide reliable service at the lowest possible cost. Conversely, externalities is an 

environmental protection policy that increases ratepayer costs. 

"In implementing this policy, the (PUC) is implicitly making a trade-off between the 

economic well-being of the (state's) ratepayers and the perceived environmental well-being 

of out-of-state residents" [po 25]. Furthermore, the state regulatory agency is assuming 

responsibilities that continue to rest with environmental agencies. In turn, this creates a need 

for administrative capabilities within PUCs that are essentially duplicative of those held by 

other state agencies. 

A third potential consequence of this co-mingling of institutional functions could be 

increased electricity prices to achieve environmental goals. Given that the power to regulate 

is the power to tax, lifting the obligation to hold rates to a minimum would remove "a 

principle barrier to its irresponsible exercise" [po 26]. Furthermore, the introduction of 

environmental externalities into the IRM process creates "additional opportunities for 

advocates of specific environmental goals to achieve their objectives, irrespective of whether 

a broad political or scientific consensus ... has been reached" [p.29]. 

SUPPORTING DOCUMENTATION 

Andrews, Clinton J. and Stephen R. Connors. "Existing Capacity -- The Key to Reducing 

Emissions." MIT Energy Laboratory, 17 May 1991 (draft). 

Andrews, Clinton J. "The Marginality of Regulating Marginal Investments," 11 June 1991 

(forthcoming in Energy Policy). 

Jorgenson, Dale and Peter Wilcoxen. "Reducing U.S. Carbon Dioxide Emissions: The Cost 

of Different Goals." Department of Economics, Harvard University, December 1990 

(mimeo). 

Kahn, Alfred. Wall Street Journa~ 7 August 1991. 

36 
National Academy of Sciences. Policy Implications of Greenhouse Warming.- Report of the

Mitigation Panel. Washington, D.C.: National Academy Press, 1991.

New York Times, 23 September 1991.

Shimshak, R. et al. "Comments of the Division of Energy Resources for D.P.U. 89-239," 23

February 1990.

37

EE-RM-93-801 COMMENT OR12

National Academy of Sciences. Policy Implications of Greenhouse Warming: Report of the 

Mitigation Panel. Washington, D.C.: National Academy Press, 1991. 

New York Times} 23 September 1991. 

Shimshak, R. et al. "Comments of the Division of Energy Resources for D.P.U. 89-239," 23 

February 1990. 

37 
J. N EPA

Public Utility Commission of Texas

7800 Shoal Creek Boulevard

Austin, Texas 78757

PROFILE

Mr. Nalepa is a Fuel Analyst in the Electric Division of the Public Utility Commission

(PUC) of Texas. Prior to joining the Commission in 1988, he served as a Reservoir

Engineer and Technician with an oil and natural gas exploration company for eight years.

TESTIMONY REFERENCED

"Direct Testimony of Karl J. Nalepa, Electric Division, Public Utility Commission of Texas

on the Application of Texas Utilities Electric Company for Approval of its Notice of Intent,"

Public Utility Commission of Texas Docket No. 10400, August 28, 1991.

STATE REGULATORY ISSUE ADDRESSED

The PUC is required to review the notification filed by TU Electric of its intent to construct

new generating facilities. As directed under Substantive Rule 23.31, environmental costs and

benefits must be considered for each proposed facility in a utility's Notice of Intent. This

requires the monetization of externalities as part of the resource application.

SUMMARY OF CONCLUSIONS

Contending that the total cost of a power supply option can only be evaluated when all

environmental costs are considered, Mr. Nalepa recommends that the Commission should

further investigate environmental externalities and establish either specific values or more

specific guidelines for addressing environmental costs in resource plans. He further

recommends that TU Electric expand the boundaries of the environmental costs it now

considers and incorporate those costs into its subsequent Commission filings.

KEYISSUES

The following issues concerning environmental externalities were raised in the direct

testimony of Mr. Nalepa. Page citations directly follow all direct quotations from this

testimony.

38

EE-RM-93-801 COMMENT OR12

PROFILE 

KARL J. NALEPA 

Public Utility Commission of Texas 

7800 Shoal Creek Boulevard 

Austin, Texas 78757 

Mr. Nalepa is a Fuel Analyst in the Electric Division of the Public Utility Commission 

(PUC) of Texas. Prior to joining the Commission in 1988, he served as a Reservoir 

Engineer and Technician with an oil and natural gas exploration company for eight years. 

TESTIMONY REFERENCED 

IIDirect Testimony of Karl J. Nalepa, Eleytric Division, Public Utility Commission of Texas 

on the Application of Texas Utilities Electric Company for Approval of its Notice of Intent,1I 

Public Utility Commission of Texas Docket No. 10400, August 28, 1991. 

STATE REGULATORY ISSUE ADDRESSED 

The PUC is required to review the notification filed by TU Electric of its intent to construct 

new generating facilities. As directed under Substantive Rule 23.31, environmental costs and 

benefits must be considered for each proposed facility in a utility's Notice of Intent. This 

requires the monetization of externalities as part of the resource application. 

SUMMARY OF CONCLUSIONS 

Contending that the total cost of a power supply option can only be evaluated when all 

environmental costs are considered, Mr. Nalepa recommends that the Commission should 

further investigate environmental externalities and establish either specific values or more 

specific guidelines for addressing environmental costs in resource plans. He further 

recommends that TU Electric expand the boundaries of the environmental costs it now 

considers and incorporate those costs into its subsequent Commission filings. 

KEY ISSUES 

The following issues concerning environmental externalities were raised in the direct 

testimony of Mr. Nalepa. Page citations directly follow all direct quotations from this 

testimony. 

38 
Environmental Externality Policy Options

Environmental externalities are "costs to society resulting from provision of electric services,

which costs are not already incorporated in the price of electric services . They are costs

which occur after all government-imposed environmental standards and regulations are met"

[p. 10].

The incorporation of real environmental costs into the utility planning process allows for a

true determination of least-cost sources of future electricity.

The most significant environmental effects "which may result directly from fossil fuel-fired

power plants " [p. 6] are health care, acid rain, global warming and visibility impairment.

Environmental Externality Valuation Approaches

"It is generally believed that unaccounted for costs to society occur as a result of power plant

operations and, as difficult as it may be, a serious attempt should be made to quantify those

costs" [p. 11]. The two methods for estimating externality values are:

damage costs can be established directly and this method "is useful when appropriate

analogous examples are available" [p. 12]; and

cost of control estimates are the physical costs "of attaining a legislated level of

emissions, not the societal costs attributable to the particular pollutant. There may

be little relationship between control costs and the actual effects on human health or

the landscape " [p. 12].

In proposing monetized externality values, Mr. Nalepa uses the values adopted by the

Nevada PUC. He contends that these are applicable to resource planning in Texas.

Using the TU Electric 's costs of compliance for sulfur dioxide emissions, as required under

the Clean Air Act Amendments of 1990, and "assuming external environmental costs of 5.1

cents per kWh, [Mr. Nalepa] estimated the additional environmental cost of these remaining

emissions as $203 million per year" [p. 17].

"By adding environmental costs as estimated by the Public Service Commission of Nevada"

[p. 17], the total cost of a pulverized coal plant and an integrated gasification combined cycle

plant are nearly identical.

Zero Externality Values

Mr. Nalepa concurs with the position of F. Paul Bland, as quoted in the Pace study. "A

decision not to consider external costs in itself quantifies them by setting their value at zero.

This is unreasonable, given both the strong evidence that the costs are massive , and the

significant difference between the externalized costs of traditional central station plants and

39

EE-RM-93-801 COMMENT OR12

Environmental Externality Policy Options 

Environmental externalities are "costs to society resulting from provision of electric services, 

which costs are not already incorporated in the price of electric services. They are costs 

which occur after all government-imposed environmental standards and regulations are met" 

[po 10]. 

The incorporation of real environmental costs into the utility planning process allows for a 

true determination of least-cost sources of future electricity. 

The most significant environmental effects "which may result directly from fossil fuel-fired 

power plants" [po 6] are health care, acid rain, global warming and visibility impairment. 

Environmental Externality Valuation Approacbes 

"It is generally believed that unaccounted for costs to society occur as a result of power plant 

operations and, as difficult as it may be, a serious attempt should be made to quantify those 

costs" [po 11]. The two methods for estimating externality values are: 

• damage costs can be established directly and this method "is useful when appropriate 

analogous examples are available" [po 12]; and 

• cost of control estimates are the physical costs "of attaining a legislated level of 

emissions, not the societal costs attributable to the particular pollutant. There may 

be little relationship between control costs and the actual effects on human health or 

the landscape" [po 12]. 

In proposing monetized externality values, Mr. Nalepa uses the values adopted by the 

Nevada PUc. He contends that these are applicable to resource planning in Texas. 

Using the TU Electric's costs of compliance for sulfur dioxide emissions, as required under 

the Clean Air Act Amendments of 1990, and "assuming external environmental costs of 5.1 

cents per kWh, [Mr. Nalepa] estimated the additional environmental cost of these remaining 

emissions as $203 million per year" [po 17]. 

"By adding environmental costs as estimated by the Public Service Commission of Nevada" 

[po 17], the total cost of a pulverized coal plant and an integrated gasification combined cycle 

plant are nearly identical. 

Zero Externality Values 

Mr. Nalepa concurs with the position of F. Paul Bland, as quoted in the Pace study. itA 

decision not to consider external costs in itself quantifies them by setting their value at zero. 

This is unreasonable, given both the strong evidence that the costs are massive, and the 

significant difference between the externalized costs of traditional central station plants and 

39 
alternative energy facilities. A crude approximation, made as exact as possible and changed

over time to reflect new information, would be preferable to the manifestly unjust

approximation caused by ignoring those costs" [p. 11].

SUPPORTING DOCUMENTATION

Clean Air Act Amendments. Senate Report No. 101-228.

Norris, James E. "The Navajo Generating Plant and Grand Canyon Haze," Public Utilities

Fortnightly, 15 January 1991.

Pace University Center for Environmental Legal Studies. Environmental Costs of Electricity.

(New York: Oceana Publications, 1990).

Putta, Sury N. "Weighing Externalities in New York State," The Electricity Journal, July 1990.

Texas Air Control Board. "Air Quality in Texas." December 1988.

Utility Environment Report. 19 April, 17 May, 31 May, 26 July 1991.

Wiel, Stephen. "Nevada Adopts Clean Power Rule." Presented at Conference on

Demand-Side Management and the Global Environment, April 1991.

40

EE-RM-93-801 COMMENT OR12

alternative energy facilities. A crude approximation, made as exact as possible and changed 

over time to reflect new information, would be preferable to the manifestly unjust 

approximation caused by ignoring those costs" [po 11]. 

SUPPORTING DOCUMENTATION 

Clean Air Act Amendments. Senate Report No. 101-228. 

Norris, James E. "The Navajo Generating Plant and Grand Canyon Haze," Public Utilities 

Fortnightly, 15 January 1991. 

Pace University Center for Environmental Legal Studies. Environmental Costs of Electricity. 

(New York: Oceana Publications, 1990). 

Putta, Sury N. "Weighing Externalities in New York State," The Electricity Journal, July 1990. 

Texas Air Control Board. "Air Quality in Texas." December 1988. 

Utility Environment Report. 19 April, 17 May, 31 May, 26 July 1991. 

Wiel, Stephen. "Nevada Adopts Clean Power Rule." Presented at Conference on 

Demand-Side Management and the Global Environment, April 1991. 

40 
WILLIAM D. NORDHAUS

Yale University

445 Humphrey Street

New Haven, Connecticut 06511

PROFILE

Dr. Nordhaus is the John Musser Professor of Economics at Yale and a research staff

member of the Cowles Foundation for Research in Economics. He previously served as a

member of President Carter's Council of Economic Advisors and as Provost of Yale. His

economic research has been focused on energy, natural resources and the environment, with

a recent emphasis on greenhouse warming. A co-author of the classic textbook, Economics,

Dr. Nordhaus has served on several National Academy of Sciences committees.

TESTIMONY REFERENCED

"Testimony of Dr. William D. Nordhaus on Behalf of Massachusetts Electric Company in

the Investigation by the Department on its Own Motion as to the Environmental Externality

Values to be Used in Resource Cost-Effectiveness Tests by Electric Companies Subject to

the Department's Jurisdiction," Massachusetts Department of Public Utilities Docket No.

D.P.U. 91-131, May 16, 1991.

STATE GU TORY ISSUE ADDRESSED

The Massachusetts Department of Public Utilities (D.P.U.) is investing monetized

environmental externality values and their inclusion in the electric utility integrated resource

management process.

SUMMARY OF CONCLUSIONS

Dr. Nordhaus concludes that $2 per metric ton (in 1989 dollars) is a reasonable estimate of

the optimal value of reducing carbon dioxide (C02) emissions. In lieu of using this

monetized value in resource planning, he recommends utilities be allowed to acquire or

produce offsets if they were more economical than the $2 per metric ton cost.

KEY ISSUES

The following issues concerning environmental externalities were raised in the direct

testimony of Dr. Nordhaus. Page citations directly follow all direct quotations from this

testimony.

41

EE-RM-93-801 COMMENT OR12

WILLIAM D. NORDHAUS 

Yale University 

445 Humphrey Street 

New Haven, Connecticut 06511 

PROFILE 

Dr. Nordhaus is the John Musser Professor of Economics at Yale and a research staff 

member of the Cowles Foundation for Research in Economics. He previously served as a 

member of President Carter's Council of Economic Advisors and as Provost of Yale. His 

economic research has been focused on energy, natural resources and the environment, with 

a recent emphasis on greenhouse warming. A co-author of the classic textbook, Economics, 

Dr. Nordhaus has served on several National Academy of Sciences committees. 

TESTIMONY REFERENCED 

"Testimony of Dr. William D. Nordhaus on Behalf of Massachusetts Electric Company in 

the Investigation by the Department on its Own Motion as to the Environmental Externality 

Values to be Used in Resource Cost-Effectiveness Tests by Electric Companies Subject to 

the Department's Jurisdiction," Massachusetts Department of Public Utilities Docket No. 

D.P.U. 91-131, May 16, 1991. 

STATE REGULATORY ISSUE ADDRESSED 

The Massachusetts Department of Public Utilities (D.P.U.) is investing monetized 

environmental externality values and their inclusion in the electric utility integrated resource 

management process. 

SUMMARY OF CONCLUSIONS 

Dr. N ordhaus concludes that $2 per metric ton (in 1989 dollars) is a reasonable estimate of 

the optimal value of reducing carbon dioxide (C02) emissions. In lieu of using this 

monetized value in resource planning, he recommends utilities be allowed to acquire or 

produce offsets if they were more economical than the $2 per metric ton cost. 

KEY ISSUES 

The following issues concerning environmental externalities were raised in the direct 

testimony of Dr. Nordhaus. Page citations directly follow all direct quotations from this 

testimony. 

41 
Environmental Externality Poligy Options

"At present, there are great uncertainties about virtually every stage of the relationship

between emissions of greenhouse gases (GHGs) and the ultimate impact upon human and

natural societies. Although there is a scientific consensus about the existence of the

greenhouse effect, the range of possible outcomes is extremely large" [p. 5].

Of the following three policy options relative to GHGs, Dr. Nordhaus concludes that the first

strategy "is most relevant for policy because preventative steps can be taken today" [p. 6],

while the remaining two can be initiated as climate changes occur.

1. Prevention -- Take steps such as phasing out CFCs, reducing energy consumption or

switching to non-fossil fuel to prevent or slow GHG emissions.

2. Climatic Engineering -- Offset climatic warming through CO2 removal or climatic

engineering. Among the options considered are reforestation.

3. Adaptation -- Responses to warmer climates made by people, institutions and

markets.

Environmental Externality Valuation Approaches

The impact of climatic change is assessed in terms of both damage costs and reduction

benefits.

Cost estimates of GHG reductions are based on a survey conducted by Dr. Nordhaus which

looked at those achieved through: "(1) reducing CFC emissions, (2) reducing CO2 emissions,

and (3) increasing the carbon locked up in trees" [p. 6]. Although there are more than 12

different cost estimates for reducing CO2 that frequently differ by a factor of two or three,

"the general shape of the cost curves are similar. The costs of CFC reduction are not

terribly controversial. By contrast, the estimates of reforestation options are highly

controversial and not well documented" [pp. 6-7].

Benefit values of GHG reduction were derived through the use of a static cost-benefit

model. These estimates reflect the"optimal degree of control of greenhouse gases along with

an associated value for the reduction of CO2 and other greenhouse gases" [p. 9].

Interim CO2 Externality Values

Although estimating the damages from greenhouse warming is extremely difficult, a

"doubling of CO2 will lead to economic damages of around $13 billion per year (for the

United States, in 1989 prices and at 1989 levels of economic activity). This amounts to

approximately one-fourth of one percent of U.S. gross national product" [p. 8].

42

EE-RM-93-801 COMMENT OR12

Environmental Externality Policy Options 

"At present, there are great uncertainties about virtually every stage of the relationship 

between emissions of greenhouse gases (GHGs) and the ultimate impact upon human arid 

natural societies. Although there is a scientific consensus about the existence of the 

greenhouse effect, the range of possible outcomes is extremely large" [po 5]. 

Of the following three policy options relative to GHGs, Dr. Nordhaus concludes that the first 

strategy "is most relevant for policy because preventative steps can be taken today" [po 6], 

while the remaining two can be initiated as climate changes occur. 

1. Prevention -- Take steps such as phasing out CFCs, reducing energy consumption or 

switching to non-fossil fuel to prevent or slow GHG emissions. 

2. Climatic Engineering -- Offset climatic warming through CO2 removal or climatic 

engineering. Among the options considered are reforestation. 

3. Adaptation -- Responses to warmer climates made by people, institutions and 

markets. 

Environmental Externality Valuation Approaches 

The impact of climatic change is assessed in terms of both damage costs and reduction 

benefits. 

Cost estimates of GHG reductions are based on a survey conducted by Dr. Nordhaus which 

looked at those achieved through: "(1) reducing CFC emissions, (2) reducing CO2 emissions, 

and (3) increasing the carbon locked up in trees" [po 6]. Although there are more than 12 

different cost estimates for reducing CO2 that frequently differ by a factor of two or three, 

"the general shape of the cost curves are similar. The costs of CFC reduction are not 

terribly controversial. By contrast, the estimates of reforestation options are highly 

controversial and not well documented" [pp. 6-7]. 

Benefit values of GHG reduction were derived through the use of a static cost-benefit 

model. These estimates reflect the"optimal degree of control of greenhouse gases along with 

an associated value for the reduction of CO2 and other greenhouse gases" [po 9]. 

Interim CO2 Externality Values 

Although estimating the damages from greenhouse warming is extremely difficult, a 

"doubling of CO2 will lead to economic damages of around $13 billion per year (for the 

United States, in 1989 prices and at 1989 levels of economic activity). This amounts to 

approximately one-fourth of one percent of U.S. gross national product" [po 8]. 

42 
The three estimates of the benefits of reducing greenhouse gases are: a "best guess" of $2

per ton of C02; a "low" estimate of $0.50 per ton of C02; and a "high" estimate of $18 per

ton of CO2.

As shown in studies conducted by Dr. Nordhaus and by the National Academy of Sciences,

"there is an ample supply of C02-equivalent emissions that can be curbed at costs of no

more than $2 per ton of C02" [p. 13].

Appropriateness of State PUC4i posed Values

"There are serious questions about the efficiency of approaches that mitigate a global

externality in a region or industry that constitutes only a tiny fraction of the sources of that

externality. If a small region takes steps to reduce its greenhouse gas emissions while others

do not, this will lead to major economic inefficiencies and to an unfair sharing of the costs"

[p. 10].

SUPPORTING DOCUMENTATION

Lashof, Daniel A. and Dilip R. Ahuja.'Relative Contributions of Greenhouse Gas Emissions

to Global Warming," Nature, vol. 344, April 5, 1990, pp. 529-531.

National Academy of Sciences. Policy Implications of Greenhouse Warming. Washington, DC:

National Academy Press, 1991.

Nordhaus, William D. "The Cost of Slowing Climate Change: A Survey," The Energy

Journal, vol. 12, no. 1, pp. 37-65.

Nordhaus, William D. "To Slow or Not To Slow: The Economics of the Greenhouse

Effect," Economic Journal, vol. 101, May 1991.

43

EE-RM-93-801 COMMENT OR12

The three estimates of the benefits of reducing greenhouse gases are: a "best guess" of $2 

per ton of CO2; a "low" estimate of $0.50 per ton of CO2; and a "high" estimate of $18 per 

ton of CO2• 

As shown in studies conducted by Dr. Nordhaus and by the National Academy of Sciences, 

"there is an ample supply of CO2-equivalent emissions that can be curbed at costs of no 

more than $2 per ton of CO2'' [po 13]. 

Appropriateness of State PUC-imposed Values 

"There are serious questions about the efficiency of approaches that mitigate a global 

externality in a region or industry that constitutes only a tiny fraction of the sources of that 

externality. If a small region takes steps to reduce its greenhouse gas emissions while others 

do not, this will lead to major economic inefficiencies and to an unfair sharing of the costs" 

[po 10]. 

SUPPORTING DOCUMENTATION 

Lashof, Daniel A. and Dilip R. Ahuja. "Relative Contributions of Greenhouse Gas Emissions 

to Global Warming," Nature, vol. 344, April 5, 1990, pp. 529-531. 

National Academy of Sciences. Policy Implications of Greenhouse Warming. Washington, DC: 

National Academy Press, 1991. 

Nordhaus, William D. "The Cost of Slowing Climate Change: A Survey," The Energy 

Journa~ vol. 12, no. 'I, pp. 37-65. 

Nordhaus, William D. "To Slow or Not To Slow: The Economics of the Greenhouse 

Effect," Economic Journal, vol. 101, May 1991. 

43 
ROBERT D. ROWE

RCG/llagler Bailly, Inc.

P.O. Drawer 0

Boulder, Colorado 80306

PROFILE

Dr. Rowe is a Senior Vice President of RCG/Hagler Bailly and Director of the consulting

firm's Environmental Economics, Science and Policy Division. For more than 15 years, he

has researched the development and application of damage-based externality valuation

methods. At present, he is Project Manager for a multi-year study to assess and model

environmental externality damages of electricity resources in the State of New York. His

additional experience includes serving as an officer of the Association of Environmental and

Resource Economists and a consultant member of the U.S. EPA Science Advisory Board,

Clean Air Science Advisory Committee.

TESTIMONY REFERENCED

"Direct Testimony of Robert D. Rowe on Behalf of Massachusetts Electric Company on

Valuation of Other Environmental Externalities," Massachusetts Department of Public

Utilities Docket No. D.P.U. 91-131, October 4, 1991.

STATE REGULATORY ISSUE ADDRESSED

On its own motion, the Massachusetts Department of Public Utilities (D.P.U.) undertook

an investigation of the monetized environmental externality values to be used in utility

resource planning. As set forth in D.P.U. Order 89-239, monetized values were assigned to

eight air pollutants and utilities were directed to develop values for other externalities.

SUMMARY OF CONCLUSIONS

Dr. Rowe presents damage values on a per unit of pollutant and per kilowatt-hour (kWh)

basis for toxic air pollutants, consumptive water use, cooling water and wastewater/thermal

discharge, and land use associated with new generating units (coal steam, oil and gas steam,

gas turbine, combined cycle, integrated gasified coal and waste to energy). The externality

values are damage-based, the approach preferred by the Massachusetts D.P.U.

44

EE-RM-93-801 COMMENT OR12

PROFILE 

ROBERT D. ROWE 

RCG/Hagler Bailly, Inc. 

P.O. Drawer 0 

Boulder, Colorado 80306 

Dr. Rowe is a Senior Vice President of RCG/Hagler Bailly and Director of the consulting 

firm's Environmental Economics, Science and Policy Division. For more than 15 years, he 

has researched the development and application of damage-based externality valuation 

methods. At present, he is Project Manager for a multi-year study to assess and model 

environmental externality damages of electricity resources in the State of New York. His 

additional experience includes serving as an officer of the Association of Environmental and 

Resource Economists and a consultant member of the U.S. EPA Science Advisory Board, 

Clean Air Science Advisory Committee. 

TESTIMONY REFERENCED 

"Direct Testimony of Robert D. Rowe on Behalf of Massachusetts Electric Company on 

Valuation of Other Environmental Externalities," Massachusetts Department of Public 

Utilities Docket No. D.P.U. 91-131, October 4, 1991. 

STATE REGULATORY ISSUE ADDRESSED 

On its own motion, the Massachusetts Department of Public Utilities (D.P.U.) undertook 

an investigation of the monetized environmental externality values to be used in utility 

resource planning. As set forth in D.P.U. Order 89-239, monetized values were assigned to 

eight air pollutants and utilities were directed to develop values for other externalities. 

SUMMARY OF CONCLUSIONS 

Dr. Rowe presents damage values on a per unit of pollutant and per kilowatt-hour (kWh) 

. basis for toxic air pollutants, consumptive water use, cooling water and wastewater/thermal 

discharge, and land use associated with new generating units (coal steam, oil and gas steam, 

gas turbine, combined cycle, integrated gasified coal and waste to energy). The externality 

values are damage-based, the approach preferred by the Massachusetts D.P.U. 

44 
ISSUES

The following issues concerning environmental externalities were raised in the direct

testimony of Dr. Rowe. Page citations directly follow all direct quotations from this

testimony.

Environmental Externality Valuation Approaches

Dr. Rowe applies a "damage function approach linking facility operation to potential

resource impacts, and then to social values (damages) for those impacts" [p. 3]. Typical

levels of unmitigated residuals are identified, with damage estimates differing according to

location and facility type. The estimates developed contain assumptions, rely on professional

judgment to address the significance of uncertainties and omissions, and reflect "best

information reasonably available." No new primary research was conducted to develop these

estimates.

There are several caveats pertaining to the application of these estimates.

Due to the use of conservative assumptions, available literature and professional

judgment, the damages may be overstated for many of the externalities examined.

As the estimates apply to individual facilities supplying new capacity, damages from

multiple facilities located in the same area "may exceed the sum of the individual

facility estimates " [p. 13].

® It is likely that "site-specific factors for any proposed facility may warrant inclusion

or omission of specific externalities" [p. 13].

Overall, where residual emissions and resource impacts from new capacity do exist, they are

small, on a per kWh basis, due to environmental regulations. "In total, the sum of the

externality damages estimated amount to about 1/10th of a cent/kWh or less regardless of

the location and facility type" [p. 12].

The summary of how the values were estimated for four types of environmental impacts

follows. The results derived are shown in the following table (included as Tables S-1 and

S-3, respectively, in Dr. Rowe's testimony).

Air toxic values-were developed from "dispersion models used to link emission levels and

plant stack parameters to ambient concentrations. For carcinogens, human population

densities and the U.S. EPA's Integrated Risk Information System were used to estimate the

maximum expected additional incidence of fatal and non-fatal cancers.. .For lead and

mercury, emission rates, dispersion models and uptake biokinetic models were applied to

estimate the percent of sensitive populations" [p. 4] with blood levels above "No Adverse

Effects Levels". Standard economic values were then applied to both sets of increased risk.

"The major result is that the value of air toxic externalities, in total, is very small. The

45

EE-RM-93-801 COMMENT OR12

KEY ISSUES 

The following issues concerning environmental externalities were raised in the direct 

testimony of Dr. Rowe. Page citations directly follow all direct quotations from this 

testimony. 

Environmental Externality Valuation Approaches 

Dr. Rowe applies a "damage function approach linking facility operation to potential 

resource impacts, and then to social values (damages) for those impacts" [po 3]. Typical 

levels of unmitigated residuals are identified, with damage estimates differing according to 

location and facility type. The estimates developed contain assumptions, rely on professional 

judgment to address the significance of uncertainties and omissions, and reflect "best 

information reasonably available." No new primary research was conducted to develop these 

estimates. 

There are several caveats pertaining to the application of these estimates. 

e Due to the use of conservative assumptions, available literature and professional 

judgment, the damages may be overstated for many of the externalities examined. 

• As the estimates apply to individual facilities supplying new capacity, damages from 

multiple facilities located in the same area "may exceed the sum of the individual 

facility estimates" [po 13]. 

It is likely that "site-specific factors for any proposed facility may warrant inclusion 

or omission of specific externalities" [po 13]. 

Overall, where residual emissions and resource impacts from new capacity do exist, they are 

small, on a per kWh basis, due to environmental regulations. "In total, the sum of the 

externality damages estimated amount to about l/lOth of a cent/kWh or less regardless of 

the location and facility type" [po 12]. 

The summary of how the values were estimated for four types of environmental impacts 

follows. The results derived are shown in the following table (included as Tables S-l and 

S-3, respectively, in Dr. Rowe's testimony). 

Air toxic values· were developed from "dispersion models used to link emission levels and 

plant stack parameters to ambient concentrations. For carcinogens, human population 

densities and the U.S. EPA's Integrated Risk Information System were used to estimate the 

maximum expected additional incidence of fatal and non-fatal cancers ... For lead and 

mercury, emission rates, dispersion models and uptake biokinetic models were applied to 

estimate the percent of sensitive populations" [po 4] with blood levels above 'No Adverse 

Effects Levels". ,Standard economic values were then applied to both sets of increased risk. 

"The major result is that the value of air toxic externalities, in total, is very small. The 

45 
change in health risks due to lead and mercury emissions from new facilities are virtually

undetectable" [p. 5].

Water consumption values were derived for water withdrawn for power plant operating

processes (e.g., condensate cooling, air pollution controls, boiler blowdown) in quantities

sufficient to "impair other competing uses for drinking water supplies, aquatic habitat or

recreational uses " [p. 6]. In the analysis, a worst case is assumed whereby power plant

consumption "precludes or alters other desirable uses" [p. 6] and is substituted or replenished

from groundwater sources at a market price cost. "The results indicate that the maximum

value is less than 3/100th of a cent/kWh for a coal-fired facility, and less than 1 /1,000th of

a cent/kWh for gas- and oil-fired and MSW facilities" [p. 6].

Cooling water and wastewater/thermal discharge values reflect damage impacts due to

impingement and entrainment at the plant water intake point, and heated cooling water and

other wastewaters at the discharge point. In the analysis, the impact defined is that a 500

MW plant would render unusable a one mile equivalent of river or coastal shoreline for

recreational fishing and a one square mile inshore area for commercial fishing.

"Massachusetts average recreational participation levels, typical recreational fishing values,

and commercial fishing returns were applied to estimate the value of the impaired resource"

[pp. 7-8]. The resultant externality estimates are "on the order of 3/1,000th of a cent/kWh

for coastal plants, and on the order of 3/10,000th of a cent/kWh for inland plants" [p. 8].

Land use impacts, including loss of open space, ash disposal and aesthetics, were assessed

individually and damage estimates developed for both total land values and individual

impacts. The externality values for the former are up to 1/10th of a cent/kWh for a

coal-fired plant in a suburban location and 5/100th of a cent/kWh in a rural location.

"Oil-fired and gas-fired plants would have damages on the order of 1/100th of a cent/kWh

or less" [p. 11].

Data from Resource Preservation easements were used as an indicator of willingness to pay

to avoid development of open space and similar data from Maine were used for open spaces

in non-urban locations. The resultant estimates for a 500 MW oil-fired plant are "on the

order of 3/1,000th of a cent/kWh for a suburban location and less than 1/1,000th of a

cent/kWh for a rural location" [p. 9].

Per household values to avoid proximity (i.e., within one mile) to a hazardous waste facility

in eastern Massachusetts, which are consistent with other published values, were used to

indicate potential damage of ash disposal from the combustion of coal, oil, municipal solid

waste (MSW) and other fuels. The estimated externality costs by plant type are: 6/100th

of a cent/kWh (coal-fired plant, suburban site); less than 2/100th of a cent/kWh (coal-fired

plant, rural site); and 2/10,000th of a cent/kWh (oil-fired plant). As MSW plants reduce the

total quantity of landfill waste, they produce environmental benefits valued "on the order of

2/10th of a cent/kWh in urban areas, 3/100th of a cent/kWh in suburban areas and less than

1/100th of a cent/kWh in rural areas" [p. 10].

The estimated damages for potential aesthetic impacts from power plants and transmission

lines were derived from Resource Protection easement values as it was assumed that such

46

EE-RM-93-801 COMMENT OR12

change in health risks due to lead and mercury emissions from new facilities are virtually 

undetectable II [po 5]. 

Water consumption values were derived for water withdrawn for power plant operating 

processes (e.g., condensate cooling, air pollution controls, boiler blowdown) in quantities 

sufficient to "impair other competing uses for drinking water supplies, aquatic habitat or 

recreational uses" [po 6]. In the analysis, a worst case is assumed whereby power plant 

consumption "precludes or alters other desirable uses" [po 6] and is substituted or replenished 

from groundwater sources at a market price cost. liThe results indicate that the maximum 

value is less than 3/l00th of a cent/kWh for a coal-fired facility, and less than 1I1,000th of 

a cent/kWh for gas- and oil-fired and MSW facilities" [po 6]. 

Cooling water and wastewater/thermal discharge values reflect damage impacts due to 

impingement and entrainment at the plant water intake point, and heated cooling water and 

other wastewaters at the discharge point. In the analysis, the impact defined is that a 500 

MW plant would render unusable a one mile equivalent of river or coastal shoreline for 

recreational fishing and a one square mile inshore area for commercial fishing. 

"Massachusetts average recreational participation levels, typical recreational fishing values, 

and commercial fishing returns were applied to estimate the value of the impaired resource" 

[pp. 7-8]. The resultant externality estimates are lion the order of 3/1,000th of a cent/kWh 

for coastal plants, and on the order of 3/10,000th of a cent/kWh for inland plants" [po 8]. 

Land use impacts, including loss of open space, ash disposal and aesthetics, were assessed 

individually and damage estimates developed for both total land values and individual 

impacts. The externality values for the former are up to 1I10th of a cent/kWh for a 

coal-fired plant in a suburban location and 5/100th of a cent/kWh in a rural location. 

"Oil-fired and gas-fired plants would have damages on the order of l/lOOth of a cent/kWh 

or less" [po 11]. 

Data from Resource Preservation easements were used as an indicator of willingness to pay 

to avoid development of open space and similar data from Maine were used for open spaces 

in non-urban locations. The resultant estimates for a 500 MW oil-fired plant are lion the 

order of 3/1,000th of a cent/kWh for a suburban location and less than l/l,OOOth of a 

cent/kWh for a rurallocation" [po 9]. 

Per household values to avoid proximity (i.e., within one mile) to a hazardous waste facility 

in eastern Massachusetts, which are consistent with other published values, were used to 

indicate potential damage of ash disposal from the combustion of coal, oil, municipal solid 

waste (MSW) and other fuels. The estimated externality costs by plant type are: 6/100th 

of a cent/kWh (coal-fired plant, suburban site); less than 2/100th of a cent/kWh (coal-fired 

plant, rural site); and 2/10,000th of a cent/kWh (oil-fired plant). As MSW plants reduce the 

total quantity of landfill waste, they produce environmental benefits valued lion the order of 

2/10th of a cent/kWh in urban areas, 3/100th of a cent/kWh in suburban areas and less than 

1/100th of a cent/kWh in rural areas" [po 10]. 

The estimated damages for potential aesthetic impacts from power plants and transmission 

lines were derived from Resource Protection easement values as it was assumed that such 

46 
impacts would be reflected in property values. The estimated damages are 6/100th of a

cent/kWh in suburban areas and 1/100th of a cent/kWh in rural areas.

SUPPORTING DOCUMENTATION

None cited.

47

EE-RM-93-801 COMMENT OR12

impacts would be reflected in property values. The estimated damages are 6/100th of a 

cent/kWh in suburban areas and 1/100th oCa cent/kWh in rural areas. 

SUPPORTING DOCUMENTATION 

None cited. 

47 
Toxic

Emission

Damage

Units

Annual Emissions

500 MW Coal

(tons/yr)

500 MW Oil

(tons/yr)

12 MW MSW

(tons/yr)

Coal/Oil-Fired Plant: 150 ft Stack

Damages

(1990 $/ton)

Coal Damages

(1990 $/kWh)

Oil Damages

(1990 $/kWh)

MSW Plant: 100 ft Stack

Damages

(1990 $/ton)

Damages

(1990 $/kWh)

oge

Arsenic

Beryllium

Cadmium

Chromium

Nickel

Dioxins

Formaldehyde

Furans

POMs

PCBs

Lead - Rural

Lead - Urban

Mercury

1 ton/yr

1 ton/yr

1 ton/yr

1 ton/yr

1 ton/yr

1 ton/yr

1 ton/yr

1 ton/yr

1 ton/yr

1 ton/yr

1 ton/yr

1 ton/yr

1 ton/yr

0.226

0.0014

0.013

1.52

0.552

ND

2.24

ND

0.051

ND

0.37

0.37

0.16

0.25

0.055

0.206

0.276

16.56

ND

5.32

ND

0.11

ND

0.20

0.20

0.07

0.00279

0.0000698

0.0185

0.114

0.0958

0.000000482

ND

0.000197

0.0106

0.0000383

0.44

0.44

10,304

5,751

4,313

28,756

575

NA

47

NA

6,145

NA

0

<167

0

0.00000089

0.00000000

0.00000002

0.00001663

0.00000012

NA

0.00000004

NA

0.00000012

NA

0.00

<0.00000002

0.00

t 0006171

0.00000098

0.00000012

0.00000034

0.00000302

0.00000362

NA

0.00000009

NA

0.00000026

NA

0.00

<0.00000001

0.20 0.00

0084

29,535

16,485

12,364

212 NA

0

167

0.00000092

0.00000001

0.00000256

82,423 0.00010516

1,648 0.00000177

226,660,000 0.00000122

46,980,000 0.00010358

28,050 0.00000333

3,140,000 0.00000135

.................. cait^cluo ..................

0.00

0.00000082

0 0.00

Th0002207;,

NA = Not Available

ND = Not Detectable (except at trace levels)

Table Notes:

ROBERT D. ROWE

SUMMARY OF MIDPOINT ESTIMATES OF DGES FROM AIR TOXIC EMISSIONS

1. Annual emissions are based on a 500 MW bituminous coal plant, a 500 MW residual oil plant, and a 12 MW (500 ton/day) MSW plant.

48

EE-RM-93-801 COMMENT OR12

ROBERT D. ROWE 

SUMMARY OF MIDPOINT ESTIMATES OF DAMAGES FROM AIR TOXIC EMISSIONS 

Toxic 

Emission 

Arsenic 

Beryllium 

Cadmium 

Chromium 

Nickel 

Dioxins 

Formaldehyde 

Furans 

POMs 

PCBs 

Damage 

Units 

1 ton/yr 

1 ton/yr 

1 ton/yr 

1 ton/yr 

1 ton/yr 

1 ton/yr 

1 ton/yr 

1 ton/yr 

1 ton/yr 

NA = Not Available 

Annual Emissions 

500MW Olal 

0.226 0.25 

0.0014 0.055 

0.013 0.206 

1.52 0.276 

0.552 16.56 

ND ND 

2.24 5.32 

ND ND 

0.051 0.11 

ND ND 

ND = Not Detectable (except at trace levels) 

Table Notes: 

OlallOil-Fired Plant: 150 ft Stack 

0.00279 10,304 0.00000089 0.00000098 

0.0000698 5,751 0.00000000 0.00000012 

0.0185 4,313 0.00000002 0.00000034 

0.114 28,756 0.00001663 0.00000302 

0.0958 575 0.00000012 0.00000362 

0.000000482 NA NA NA 

ND 47 0.00000004 0.00000009 

0.000197 NA NA NA 

0.0106 6,145 0.00000012 0.00000026 

0.0000383 NA NA NA 

MSW Plant: 100 ft Stack 

29,535 0.00000092 

16,485 0.00000001 

12,364 0.00000256 

82,423 0.00010516 

1,648 0.00000177 

226,660,000 0.00000122 

212 NA 

46,980,000 0.00010358 

28,050 0.00000333 

3,140,000 0.00000135 

1. Annual emissions are based on a 500 MW bituminous coal plant, a 500 MW residual oil plant, and a 12 MW (500 ton/day) MSW plant. 

48 
Table Notes (Continued)

2. Conversion to kWh is based on a 60 percent load factor for base load coal and oil plants and 100 percent load for MSW plant.

3. Unit damages for carcinogens depend on model concentrations, population exposed, carcinogenic risk factors, and medical damages, including

loss of life.

4. Unit damages for mercury are $0 per ton below an emissions rate of 30 tons per year (60,000 pounds).

5. Unit damages for lead in rural areas are $0 per ton for emissions less than 30 tons per year (60,000 pounds ). In urban areas the possibility that

a few children exceed the 10 ug/dI threshold leads to small, but positive, damages.

6. Estimates for 300 foot stacks are less than for 100 foot stacks (see Table 3-25).

Source: RCG/Hagler, Bailly, Inc., based on analysis described in Section 3.

49

EE-RM-93-801 COMMENT OR12

Table Notes (Continued) 

2. Conversion to kWh is based on a 60 percent load factor for base load coal and oil plants and 100 percent load for MSW plant. 

3. Unit damages for carcinogens depend on model concentrations, population exposed, carcinogenic risk factors, and medical damages, including 

loss of life. 

4. Unit damages for mercury are $0 per ton below an emissions rate of 30 tons per year (60,000 pounds). 

5. Unit damages for lead in rural areas are $0 per ton for emissions less than 30 tons per year (60,000 pounds). In urban areas the possibility that 

a few children exceed the 10 ug/dl threshold leads to small, but positive, damages. 

6. Estimates for 300 foot stacks are less than for 100 foot stacks (see Table 3-25). 

Source: RCG/Hagler, Bailly, Inc., based on analysis described in Section 3. 

49 
ROBERT D. ROWE

SUMMARY OF DAMAGES IN DOLLARS PER KILOWATT-HOUR FOR 500 MW

COAL, OIL, NATURAL GAS, AND 500 TON PER DAY (12 MW) MUNICIPAL SOLID WASTE-FIRED PLANTS

Damage Unit Damages

Residual Units Damages

(1900 $/unit) Coal: 300 ft Coal: 150 ft Oil: 300 ft Oil: 150 ft Natural Gas MSW: 100 ft

(1990 $/kWh) (1990 $/kWh) (1990 $/kWh) (1990 $/kWh) (1990 $/kWh) (1990 $/kWh)

Air Toxics ton/yr (see Table S-1) 0.000006 0.000018 0.000003 0.000008 0 0.000221

Water Consumption gal/yr 0.00027 0.000272 0.000272 0.000075 0.000075 0.000069 0.000075

Wastewater

Inland Site gal/yr 0.00000005 0.000003 0.000003 0.000003 0.000003 0.000003 0.000003

Coastal Site gal/yr 0.00000053 0.000030 0.000030 0.000030 0.000030 0.000030 0.000030

Land Use (open space)

Urban acres NA NA NA NA NA NA 0

Suburban acres 26500 0.000025 0.000025 0.000025 0.000025 0.000020 0

Rural acres 7950 0.000008 0.000008 0.000008 0.000008 0.000006 0

Aesthetics -- NA NA NA NA NA NA NA

Ash Disposal

Urban tons/yr 33.32 NA NA 0.000016 0.000016 0 -0.002299

Suburban tons/yr 5.00 0.000603 0.000603 0.000002 0.000002 0 -0.000345

Rural tons/yr 1.17 0.000141 0.000141 0.000001 0.000001 0 -0.000081

Total Damages (Inland)

Urban 0.000885 0.000896 0.000098 0.000103 0.000072 -0.002000

Suburban 0.000910 0.000922 0.000109 0.000115 0.000092 -0.000046

Rural 0.000430 0.000442 0.000089 0.000095 0.000078 0.000218

Total Damages (Coastal)

Urban 0.000912 0.000923 0.000125 0.000130 0.000099 -0.001973

Suburban 0.000937 0.000949 0.000136 0.000141 0.000119 -0.000019

Rural 0.000457 0.000469 0.000116 0.000122 0.000105 0.000245

NA = Not Available

MSW = Municipal Solid Waste

50

EE-RM-93-801 COMMENT OR12

ROBERT D. ROWE 

SUMMARY OF DAMAGES IN DOLLARS PER KILOWATT·HOUR FOR 500 MW 

COAL, OIL, NATURAL GAS, AND 500 TON PER DAY (12 MW) MUNICIPAL SOliD WASTE·FIRED PLANTS 

Damage Unit Damages 

Residual Units Damages 

(1900 $/unit) Coal: 300 ft Coal: 150 ft Oil: 300 ft Oil: 150 ft Natural Gas MSW: 100 ft 

(1990 $IkWh) (1990 $IkWh) (1990 $IkWh) (1990 $IkWh) (1990 $IkWh) (1990 $IkWh) 

Air Toxics ton/yr (see Table S-1) 0.000006 0.000018 0.000003 0.000008 0 0.000221 

Water Consumption gal/yr 0.00027 0.000272 0.000272 0.000075 0.000075 0.000069 0.000075 

Wastewater 

Inland Site gal/yr 0.00000005 0.000003 0.000003 0.000003 0.000003 0.000003 0.000003 

Coastal Site gal/yr 0.00000053 0.000030 0.000030 0.000030 0.000030 0.000030 0.000030 

Land Use (open space) 

Urban acres NA NA NA NA NA NA 0 

Suburban acres 26500 0.000025 0.000025 0.000025 0.000025 0.000020 0 

Rural acres 7950 0.000008 0.000008 0.000008 0.000008 0.000006 0 

Aesthetics -- NA NA NA NA NA NA NA 

Ash Disposal 

Urban tons/yr 33.32 NA NA 0.000016 0.000016 0 -0.002299 

Suburban tons/yr 5.00 0.000603 0.000603 0.000002 0.000002 0 -0.000345 

Rural tons/yr 1.17 0.000141 0.000141 0.000001 0.000001 0 -0.000081 

Total Damages (Inland) 

Urban 0.000885 0.000896 0.000098 0.000103 0.000072 -0.002000 

Suburban 0.000910 0.000922 0.000109 0.000115 0.000092 -0.000046 

Rural 0.000430 0.000442 0.000089 0.000095 0.000078 0.000218 

Total Damages (Coastal) 

Urban 0.000912 0.000923 0.000125 0.000130 0.000099 -0.001973 

Suburban 0.000937 0.000949 0.000136 0.000141 0.000119 -0.000019 

Rural 0.000457 0.000469 0.000116 0.000122 0.000105 0.000245 

NA = Not Available 

MSW = Municipal Solid Waste 

50 
Table Notes:

1. Annual kWh are based on a 500 MW coal/oil/natural gas plant operating at 60 percent load over 30 years and a 500 ton per day MSW plant

operating at 85 percent over 30 years.

2. Air toxic emission damages are based on coal/oil plant with 300 and 150 foot stacks and MSW plant with a 100 foot stack . Unit damages for

various toxics are displayed in Table S-1.

3. Coal plant is assumed to have an on-site landfill except for urban site where ash is assumed sent to suburban site. Total area is 325 acres, 75

for plant and 250 for landfill. Only 75 acres are applied to open space damages to avoid double counting ash disposal damages.

4. Municipal solid waste is assumed to be sited at landfill so that no open space damages apply. Plant received a credit (negative damages) for

reduction in solid waste.

5. Damages for suburban and rural sites are overstated due to inclusion of air toxic damages based on an urban site.

Source: RCG/Hagler, Bailly, Inc., based on Tables S-1 and S-2.

51

EE-RM-93-801 COMMENT OR12

Table Notes: 

1. Annual kWh are based on a 500 MW coal/oil/natural gas plant operating at 60 percent load over 30 years and a 500 ton per day MSW plant 

operating at 85 percent over 30 years. 

2. Air toxic emission damages are based on coal/oil plant with 300 and 150 foot stacks and MSW plant with a 100 foot stack. Unit damages for 

various toxics are displayed in Table S-l. 

3. Coal plant is assumed to have an on-site landfill except for urban site where ash is assumed sent to suburban site. Total area is 325 acres, 75 

for plant and 250 for landfill. Only 75 acres are applied to open space damages to avoid double counting ash disposal damages. 

4. Municipal solid waste is assumed to be sited at landfill so that no open space damages apply. Plant received a credit (negative damages) for 

reduction in solid waste. 

5. Damages for suburban and rural sites are overstated due to inclusion of air toxic damages based on an urban site. 

Source: RCG/Hagler, Bailly, Inc., based on Tables S-l and S-2. 

51 
1ARRY E. RUFF

Putnam, Hayes & Bartlett, Inc.

1776 I Street,

Washington, D.C. 20006

PROFILE

Dr. Ruff, a Director with the economic and management consulting firm, works principally

in the area of electric utility economics. A former economics professor, he has long been

an advocate of the principle of environmental externalities as evidenced by his work over

the past 20 years in the public and private sectors. He has served in the U.S. Treasury and

Environmental Protection Agency researching environmental economics and was involved

with energy and environmental issues while working at the Ford Foundation and Brookhaven

National Laboratory.

TESTIMONY REFERENCED

"Direct Testimony of Larry E. Ruff on Behalf of the Delaware' Power & Light Company on

Internalizing Environmental Externalities," Delaware Public Service Commission, Docket No.

29, July 10, 1991.

STATE REGULATORY ISSUE ADDRESSED

The Delaware Public Service Commission (PSC) undertook an examination of a proposal

to monetize environmental externalities in the resource selection process, using the

Massachusetts D.P.U. values (in cents/kWh) for the costs of sulfur dioxide, nitrogen oxide

and carbon dioxide.

SUMMARY OF CONCLUSIONS

Dr. Ruff recommends that the Commission not adopt the proposal to monetize

environmental externalities using a cost of control methodology. He suggests that the

Commission work with state and regional authorities to establish a policy for internalizing

environmental externalities from all in-state sources at levels commensurate with society's

willingness to pay. He also recommends that the Commission reassess the estimates in light

of the environmental and regulatory situation in the state of Delaware before adopting a

monetization policy.

52

EE-RM-93-801 COMMENT OR12

PROFILE 

LARRY E. RUFF 

Putnam, Hayes & Bartlett, Inc. 

1776 I Street, NW 

Washington, D.C. 20006 

Dr. Ruff, a Director with the economic and management consulting firm, works principally 

in the area of electric utility economics. A former economics professor, he has long been 

an advocate of the principle of environmental externalities as evidenced by his work over 

the past 20 years in the public and private sectors. He has served in the U.S. Treasury and 

Environmental Protection Agency researching environmental economics and was involved 

with energy and environmental issues while working at the Ford Foundation and Brookhaven 

National Laboratory. 

TESTIMONY REFERENCED 

"Direct Testimony of Larry E. Ruff on Behalf of the Delaware'Power & Light Company on 

Internalizing Environmental Externalities," Delaware Public Service Commission, Docket No. 

29, July 10, 1991. 

STATE REGULATORY ISSUE ADDRESSED 

The Delaware Public Service Commission (PSC) undertook an examination of a proposal 

to monetize environmental externalities in the resource selection process, using the 

Massachusetts D.P.U. values (in cents/kWh) for the costs of sulfur dioxide, nitrogen oxide 

and carbon dioxide. 

SUMMARY OF CONCLUSIONS 

Dr. Ruff recommends that the Commission not adopt the proposal to monetize 

environmental externalities using a cost of control methodology. He suggests that the 

Commission work with state and regional authorities to establish a policy for internalizing 

environmental externalities from all in-state sources at levels commensurate with society's 

willingness to pay. He also recommends that the Commission reassess the estimates in light 

of the environmental and regulatory situation in the state of Delaware before adopting a 

monetization policy. 

52 
ISSUES

The following issues concerning environmental externalities were raised in the direct

testimony of Dr. Ruff. Page citations directly follow all direct quotations from this testimony.

Environmental Externality Policy Options

The fact that the regulatory authorities have set emission targets does not mean that they

are appropriate simply because they exist. "The history of environmental policy is replete

with demanding, `legally enforceable' standards that were seen to be infeasible soon after

(or sometimes before) they were issued, but that nonetheless remained in existence for some

time after they had lost any real operational significance" [p. 23]. The Clean Air Act of 1969

is an example of environmental targets that were compromised after being passed.

Dr. Ruff suggests two criteria be used to judge the viability of externality valuations.

Acceptability - Would society be willing to pay the costs if the emission prices were

applied universally to all emission sources? "For example, imagine requiring all the

industrial plants in the Delaware estuary to implement all control measures (including

shutting down) that would be cheaper than the suggested values of the reduced

emissions. It is likely that the costs would be unacceptable to society..." [p. 22].

Necessity - Is there a much better way to meet environmental objectives? Could

society's objectives be met using much lower estimates of the value of emissions

reductions. "If so, then these lower estimates are the right ones to use for monetizing

emissions in utility planning..." [p. 22].

Environmental Externality Valuation Approach

Dr. Ruff examines the cost of control method for monetizing the environmental externalities

associated with utility resource options . Estimating the damages associated with pollutant

emissions using observed costs of specific control , such as Best Available Control Technology

(BACT), raises several problems.

"Sub-optimal Pattern of Control - Unless emissions are being reduced in an

economically optimal way, marginal costs will differ widely across sources and hence

none of them, and particularly not the highest of them, have any necessary

relationship to society's true willingness to pay for emission reductions generally" [p.

13].

"Inappropriate Environmental Goals or Targets - If society is not really prepared to

pay the costs necessary to meet some goals, then current estimates of the costs of

meeting that goal do not represent society's willingness to pay, particularly when

history and logic demonstrate clearly that goals are often compromised when the

costs get too high" [p. 14].

53

EE-RM-93-801 COMMENT OR12

KEY ISSUES 

The following issues concerning environmental externalities were raised in the direct 

testimony of Dr. Ruff. Page citations directly follow all direct quotations from this testimony. 

Environmental Externality Policy Options 

The fact that the regulatory authorities have set emission targets does not mean that they 

are appropriate simply because they exist. "The history of environmental policy is replete 

with demanding, 'legally enforceable' standards that were seen to be infeasible soon after 

(or sometimes before) they were issued, but that nonetheless remained in existence for some 

time after they had lost any real operational significance" [po 23]. The Clean Air Act of 1969 

is an example of environmental targets that were compromised after being passed. 

Dr. Ruff suggests two criteria be used to judge the viability of externality valuations. 

e Acceptability - Would society be willing to pay the costs if the emission prices were 

applied universally to all emission sources? "Por example, imagine requiring all the 

industrial plants in the Delaware estuary to implement all control measures (including 

shutting down) that would be cheaper than the suggested values of the reduced 

emissions. It is likely that the costs would be unacceptable to society ... " [po 22]. 

Necessity - Is there a much better way to meet environmental objectives? Could 

society's objectives be met using much lower estimates of the value of emissions 

reductions. "If so, then these lower estimates are the right ones to use for monetizing 

emissions in utility planning ... " [po 22]. 

Environmental Externality Valuation Approach 

Dr. Ruff examines the cost of control method for monetizing the environmental externalities 

associated with utility resource options. Estimating the damages associated with pollutant 

emissions using observed costs of specific control, such as Best Available Control Technology 

(BACT), raises several problems. 

e "Sub-optimal Pattern of Control - Unless emISSIons are being reduced in an 

economically optimal way, marginal costs will differ widely across sources and hence 

none of them, and particularly not the highest of them, have any necessary 

relationship to society's true willingness to pay for emission reductions generally" [po 

13]. 

e "Inappropriate Environmental Goals or Targets - If society is not really prepared to 

pay the costs necessary to meet some goals, then current estimates of the costs of 

meeting that goal do not represent society's willingness to pay, particularly when 

history and logic demonstrate clearly that goals are often compromised when the 

costs get too high" [po 14]. 

53 
Environmental Dispatch

A cost/benefit analysis of conservation versus new source options can only be made

accurately by considering the overall system impact. "For example, if the new, cleaner

source would have operated to displace older, dirtier sources in the merit order, the

conservation option might actually increase emissions, forcing tighter control on some

existing sources in order to maintain the same total emission level" [p. 19]. A system-wide

approach to utilizing existing capacity, not the modification of new resource decisions, is the

key to cost-effective emissions reductions.

Zero Externality Values

"An inaccurate estimate improperly applied can easily be worse than an estimate of zero"

[p. 12]. Whether the estimate is better than zero depends on the specific situation. An

estimate may be improperly applied if it is not uniformly used over all sources of emissions

thereby placing some sources at a competitive disadvantage. "There is no logic in assuming

that an imprecise positive number must be better than zero for the practical job of

improving utility decisions in a complex and far-from-optimal situation" [p. 13].

Potential PUC Conflicts/Disadvantages

The valuation of externalities is not a policy that can be applied on a piecemeal basis (i.e.,

on new source selection and not existing power plants, on electric utilities only and not

competitive energy sources). "Efforts to internalize costs piecemeal, particularly by

authorities who have control over only a limited range of potentially environmentally

damaging activities, may well make things worse rather than better, both economically and

environmentally" [p. 6].

SUPPORTING DOCUMENTATION

None cited.

54

EE-RM-93-801 COMMENT OR12

Environmental Dispatch 

A cost/benefit analysis of conservation versus new source options can only be made 

accurately by considering the overall system impact. "For example, if the new, cleaner 

source would have operated to displace older, dirtier sources in the merit order, the 

conservation option might actually increase emissions, forcing tighter control on some 

existing sources in order to maintain the same total emission level" [po 19]. A system-wide 

approach to utilizing existing capacity, not the modification of new resource decision~, is the 

key to cost-effective emissions reductions. 

Zero Externality Values 

"An inaccurate estimate improperly applied can easily be worse than an estimate of zero" 

[po 12]. Whether the estimate is better than zero depends on the specific situation. An 

estimate may be improperly applied if it is not uniformly used over all sources of emissions 

thereby placing some sources at a competitive disadvantage. "There is no logic in assuming 

that an imprecise posit~ve number must be better than zero for the practical job of 

improving utility decisions in a complex and far-from-optimal situation" [po 13]. 

Potential PUC Conflicts/Disadvantages 

The valuation of externalities is not a policy that can be applied on a piecemeal basis (i.e., 

on new source selection and not existing power plants, on electric utilities only and not 

competitive energy sources). "Efforts to internalize costs piecemeal, particularly by 

authorities who have control over only a limited range of potentially environmentally 

damaging activities, may well make things worse rather than better, both economically and 

environmentally" [po 6]. 

SUPPORTING DOCUMENTATION 

None cited. 

54 
GAYATRI M. SCHILBERG LL B. MARCUS

JBS Energy Inc.

311 D Street, Suite A

West Sacramento, California 95605

PROFILE

William Marcus and Gayatri Schilberg are Consulting Economists at JBS Energy Inc.

TESTIMONY REFERENCED

"Prepared Testimony of Gayatri Schilberg and William B. Marcus on Behalf of the

Independent Energy Producers Association on the Measurement and Valuing of Air

Emissions in Preliminary ER-90 Resource Cases," California Energy Commission, Docket

No. 88-ER-8, February 21, 1990.

STATE REGULATORY ISSUE ADDRESSED

The Commission is investigating the method proposed by the Independent Energy Producers

(IEP) to analyze air quality impacts on resource choice scenarios.

SUMMARY OF CONCLUSIONS

The authors recommend that the Commission adopt the quantified values proposed by the

IEP for reducing emissions of all major criteria and non-criteria pollutants including NOX,

ROG, SOX, C02, CH4 and N20. They contend that these values are preferred for planning

purposes because the "numbers are derived from a coherent theoretical foundation, base

differences among basins on an understanding of local and global pollutant effects, contain

appropriate relative valuation of pollutants, incorporate fixed charge rates inclusive of utility

income taxes... and are conservative" [p. 18].

KEY ISSUES

The following issues concerning environmental externalities were raised in the testimony of

William B. Marcus and Gayarti Schilberg. Page citations directly follow all direct quotations

from this testimony.

55

EE-RM-93-801 COMMENT OR12

PROFILE 

GAYATRI M. SCHILBERG & WILLIAM B. MARCUS 

JBS Energy Inc. 

311 D Street, Suite A 

West Sacramento, California 95605 

William Marcus and Gayatri Schilberg are Consulting Economists at JBS Energy Inc. 

TESTIMONY REFERENCED 

"Prepared Testimony of Gayatri Schilberg and William B. Marcus on Behalf of the 

Independent Energy Producers Association on the Measurement and Valuing of Air 

Emissions in Preliminary ER-90 Resource Cases," California Energy Commission, Docket 

No. 88-ER-8, February 21, 1990. 

STATE REGULATORY ISSUE ADDRESSED 

The Commission is investigating the method proposed by the Independent Energy Producers 

(IEP) to analyze air quality impacts on resource choice scenarios. 

SUMMARY OF CONCLUSIONS 

The authors recommend that the Commission adopt the quantified values proposed by the 

IEP for reducing emissions of all major criteria and non-criteria pollutants including NOx, 

ROG, SOx, CO2, CH4 and N20. They contend that these values are preferred for planning 

purposes because the "numbers are derived from a coherent theoretical foundation, base 

differences among basins on an understanding of local and global pollutant effects, contain 

appropriate relative valuation of pollutants, incorporate fixed charge rates inclusive of utility 

income taxes ... and are conservative" [po 18]. 

KEY ISSUES 

The following issues concerning environmental externalities were raised in the testimony of 

William B. Marcus and Gayarti Schilberg. Page citations directly follow all direct quotations 

from this testimony. 

55 
Environmental Externalities Valuation Approaches

To estimate the marginal benefit of reductions in NON, ROG, SON, C®2, CH4 and N201

values per ton of emissions are calculated from sources within Southern California, other

parts of the state and from purchased out-of-state supply sources. The methodology follows

a four step process:

® analyze major pollutants from electricity generation;

® identify local versus global emissions;

® obtain value per ton of each emission based on the theory of revealed preference;

and

® obtain societal value of emission reductions by applying per ton emission valuation

factors.

The marginal benefit of criteria pollutant reductions to society is implied from the cost of

controlling emissions in order to comply with environmental regulations. This is justified

because "rational regulators reveal the preference of society for emissions reduction" [p. 2].

The benefit of reducing non-criteria pollutants, those for which there is no regulation, such

as greenhouse gases, are based on the cost of reforestation. "This cost represents the cost

of reducing the greenhouse risk" [p. 3].

The recommended environmental externality values are shown in the following table.

Scope of Monetized Environmental Externalities

In addition to incorporating monetized environmental externalities into the electric utility

least-cost planning process, monetized values should also be used in the new resource

screening and dispatch decision processes. "Technologies such as geothermal may thus never

receive credit in the planning process for displacing higher emissions from coal, if they are

never considered as the deferred resource due to cost screening curves based only on private

costs which do not include the value to society of reducing environmental externalities" [p.

16].

"To make proper planning decisions concerning the required quantity of cleaner alternatives

to existing generation, the cost effectiveness of retirement and refurbishment in face of other

alternatives, and the optimal quantity of demand-side management, the environmental

effects need to be considered as well as the private costs" [p. 18].

56

EE-RM-93-801 COMMENT OR12

Environmental Externalities Valuation Approaches 

To estimate the marginal benefit of reductions in NOx, ROG, SOx, CO2, CH4 and N20, 

values per ton of emissions are calculated from sources within Southern California, other 

parts of the state and from purchased out-of-state supply sources. The methodology follows 

a four step process: 

@ analyze major pollutants from electricity generation; 

identify local versus global emissions; 

obtain value per ton of each emission based on the theory of revealed preference; 

and 

• obtain societal value of emission reductions by applying per ton emission valuation 

factors. 

The marginal benefit of criteria pollutant reductions to society is implied from the cost of 

controlling emissions in order to comply with environmental regulations. This is justified 

because "rational regulators reveal the preference of society for emissions reduction" [po 2]. 

The benefit of reducing non-criteria pollutants, those for which there is no regulation, such 

as greenhouse gases, are based on the cost of reforestation. "This cost represents the cost 

of reducing the greenhouse risk" [po 3]. 

The recommended environmental externality values are shown in the following table. 

Scope of Monetized Environmental Externalities 

In addition to incorporating monetized environmental externalities into the electric utility 

least-cost planning process, monetized values should also be used in the new resource 

screening and dispatch decision processes. "Technologies such as geothermal may thus never 

receive credit in the planning process for displacing higher emissions from coal, if they are 

never considered as the deferred resource due to cost screening curves based only on private 

costs which do not include the value to society of reducing environmental externalities" [po 

16]. 

"To make proper planning decisions concerning the required quantity of cleaner alternatives 

to existing generation, the cost effectiveness of retirement and refurbishment in face of other 

alternatives, and the optimal quantity of demand-side management, the environmental 

effects need to be considered as well as the private costs" [po 18]. 

56 
SCIIILBERG & MARCUS

RECOMMENDED VALUES FOR EMISSIONS REDUCTION

($/ton of emissions)

South Coast Remainder of

Pollutant Air Basin California Out-of-State

(basis for value) (basis for value) (basis for value)

Nitrogen Oxide (NOr) $24,500 $18,800' $2,700

(SCAQMD) (revealed preference) (New York State

Energy Office)

Reactive Organic Gases $17,600 $1,130 $665

(ROG)2 (SCAQMD) (vapor recovery (vapor recovery

device costs) device costs)

Sulfur Oxides (SO..) $18,300 $1,800 $1,000

(SCAQMD) (revealed preference) (revealed preference)

Carbon Dioxide (CO2) $14.70 $14.70 $14.70

(reforestation costs) (reforestation costs) (reforestation costs)

Methane (CH4) $375 $375 $375

(CO2 multiplier) (CO2 multiplier) (CO2 multiplier)

Nitrous Oxide (N20) $3,700 $3,700 $3,700

(CO2 multiplier) (CO2 multiplier) (CO2 multiplier)

1. Except some attainment areas near the Oregon border.

2. ROG is similar to VOC (Volatile Organic Compounds) discussed in other prepared testimony on this

issue.

Interim Co., Externality Values

Since the emission of CO2 is not currently regulated, revealed preference, society's value as

implied by regulatory action, cannot be applied. "In face of the risk of global climate

change, however, insurance to minimize that possibility has some value, and thus we

recognize that reduction of greenhouse gases does have a positive value to society" [p. 3].

Environmental Dispatch

Environmental externality valuations could be incorporated into electricity dispatch decision

in order to determine whether they should become an operating criterion. "A sensitivity case

should be run incorporating dispatch based on private plus environmental costs. When the

base case is compared with this sensitivity the change in utility cost (excluding emissions

valuation) will be revealed" [p. 18].

57

EE-RM-93-801 COMMENT OR12

SCHILBERG & MARCUS 

RECOMMENDED VALUES FOR EMISSIONS REDUCTION 

($/ton of emissions) 

South Coast Remainder of 

Pollutant Air Basin California Out-of-State 

(basis for value) (basis for value) (basis for value) 

Nitrogen Oxide (NOx) $24,500 $ 18,80OZ $2,700 

(SCAQMD) (revealed preference) (New York State 

Energy Office) 

Reactive Organic Gases $17,600 $1,130 $665 

(ROGi (SCAQMD) (vapor recovery (vapor recovery 

device costs) . device costs) 

Sulfur Oxides (SOx) $18,300 $1,800 $1,000 

(SCAQMD) (revealed preference) (revealed preference) 

carbon Dioxide (CO2) $14.70 $14.70 $14.70 

(reforestation costs) (reforestation costs) (reforestation costs) 

Methane (CH4) $375 $375 $375 

(C02 multiplier) (C02 multiplier) (C02 multiplier) 

Nitrous Oxide (N2O) $3,700 $3,700 $3,700 

(C02 multiplier) (C02 multiplier) (C02 multiplier) 

1. Except some attainment areas near the Oregon border. 

2. ROG is similar to VOC (Volatile OrganiC Compounds) discussed in other prepared testimony on this 

issue. 

Interim CO2 Externality Values 

Since the emission of CO2 is not currently regulated, revealed preference, society's value as 

implied by regulatory action, cannot be applied. "In face of the risk of global climate 

change, however, insurance to minimize that possibility has some value, and thus we 

recognize that reduction of greenhouse gases does have a positive value to society" [po 3]. 

Environmental Dispatch 

Environmental externality valuations could be incorporated into electricity dispatch decision 

in order to determine whether they should become an operating criterion. "A sensitivity case 

should be run incorporating dispatch based on private plus environmental costs. When the 

base case is compared with this sensitivity the change in utility cost (excluding emissions 

valuation) will be revealed" [po 18]. 

57 
Appropriateness of State PUC-imposed Values

When valuing emission costs, the distinction must be made between in-state and out-of-state

sources as well as between local and global emissions. "The value of local pollutants, which

affect only the area of origin, may differ among basins, depending on the level of attainment

for that pollutant... The value for reducing global pollutants, however, will be the same no

matter where the emissions are generated, as they affect all areas equally" [p. 2].

SUPPORTING DOCUMENTATION

None cited.

58

EE-RM-93-801 COMMENT OR12

Appropriateness of State PUC-imposed Values 

When valuing emission costs, the distinction must be made between in-state and out-of-state 

sources as well as between local and global emissions. "The value of local pollutants, which 

affect only the area of origin, may differ among basins, depending on the level of attainment 

for that pollutant...The value for reducing global pollutants, however, will be the same no 

matter where the emissions are generated, as they affect all areas equally" [po 2]. 

SUPPORTING DOCUMENTATION 

None cited. 

58 
RICHARD L. SCE LENSES

Massachusetts Institute of Technology

50 Memorial Drive -- Room E52-456

Cambridge, Massachusetts 02139

PROFILE

Dr. Schmalensee is the Gordon Y. Billard Professor of Economics and Management at the

Massachusetts Institute of Technology and serves as the Director of the MIT Center for

Energy Policy Research. A widely published author, Professor Schmalensee also is a special

consultant to National Economic Research Associates, Inc. As a member of the President's

Council of Economic Advisers from 1989 to 1991, he served on the White House Clean Air

Strategy Group, the Environmental Policy Review Group, the Global Change Strategy

Working Group and the White House Conference on Science and Economic Research.

TESTIMONY REFERENCED

"Direct Testimony of Richard L. Schmalensee on Behalf of Massachusetts Electric Company,

Western Massachusetts Electric Company and Boston Edison Company in the Investigation

by the Department on its Own Motion as to the Environmental Externality Values to be

Used in Resource Cost-Effectiveness Tests by Electric Companies Subject to the

Department's Jurisdiction," Massachusetts Department of Public Utilities Docket No. D.P.U.

91-131, October 4, 1991.

STATE REGULATORY ISSUE ADDRESSED

Under its Order on Integrated Resource Management (IRM), the Massachusetts

Department of Public Utilities (D.P.U.) directs electric utilities to consider all air, water,

solid waste and spent fuel disposal impacts resulting from plant operation in the resource

evaluation process. In addition, D.P.U. Order 89-239 prescribes monetized environmental

externality values for eight air pollutants (CO2, CH41 CO, N2O, NOR, SO2, TSPs and VOCs)

that are to be incorporated into the electric utility IRM process.

SUMMARY OF CONCLUSIONS

Dr. Schmalensee draws three conclusions concerning the development, application and role

of externality values in the integrated resource management process. First, the marginal

cost of control methodology used in D.P.U. 89-239 "to calculate `externality values' is

incorrect in principle and thus likely to lead to undesirable results in practice" [p. 3].

Second, if values are to be calculated, they should be based on non-internalized residual

damages and applied only to net incremental emissions after offsets. Third, in lieu of a

59

EE-RM-93-801 COMMENT OR12

PROFILE 

RICHARD L. SCHMALENSEE 

Massachusetts Institute of Technology 

50 Memorial Drive .- Room E52-456 

Cambridge, Massachusetts 02139 

Dr. Schmalensee is the Gordon Y. Billard Professor of Economics and Management at the 

Massachusetts Institute of Technology and serves as the Director of the MIT Center for 

Energy Policy Research. A widely published author, Professor Schmalensee also is a special 

consultant to National Economic Research Associates, Inc. As a member of the President's 

Council of Economic Advisers from 1989 to 1991, he served on the White House Clean Air 

Strategy Group, the Environmental Policy Review Group, the Global Change Strategy 

Working Group and the White House Conference on Science and Economic Research. 

TESTIMONY REFERENCED 

"Direct Testimony of Richard L. Schmalensee on Behalf of Massachusetts Electric Company, 

Western Massachusetts Electric Company and Boston Edison Company in the Investigation 

by the Department on its Own Motion as to the Environmental Externality Values to be 

Used in Resource Cost-Effectiveness Tests by Electric Companies Subject to the· 

Department's Jurisdiction," Massachusetts Department of Public Utilities Docket No. D.P.U. 

91-131, October 4, 1991. 

STATE REGULATORY ISSUE ADDRESSED 

Under its Order on Integrated Resource Management (IRM), the Massachusetts 

Department of Public Utilities (D.P.U.) directs electric utilities to consider all air, water, 

solid waste and spent fuel disposal impacts resulting from plant operation in the resource 

evaluation process. In addition, D.P.U. Order 89-239 prescribes monetized environmental 

externality values for eight air pollutants (C02, CH4, CO, N20, NOx' S02' TSPs and VOCs) 

that are to be incorporated into the electric utility IRM process. 

SUMMARY OF CONCLUSIONS 

Dr. Schmalensee draws three conclusions concerning the development, application and role 

of externality values in the integrated resource management process. First, the marginal 

cost of control methodology used in D.P.U. 89-239 "to calculate 'externality values' is 

incorrect in principle and thus likely to lead to undesirable results in practice" [po 3]. 

Second, if values are to be calculated, they should be based on non-internalized residual 

damages and applied only to net incremental emissions after offsets. Third, in lieu of a 

59 
piecemeal approach to environmental protection, the D.P.U. should address broader

environmental concerns by promoting least-cost control strategies.

ISSUES

The following issues concerning environmental externalities were raised in the direct

testimony of Dr. Schmalensee. Page citations directly follow all direct quotations from this

testimony.

Environmental Externality Policy Options

In a market economy, when some costs or benefits are not reflected in the prices of goods

and services, "production decisions are not socially optimal. Environmental effects are in

many respects the most important example of such 'externalities "' [p. 7].

Two logically distinct conditions most hold if an externality is to exist: (1) "the firm's

activities must create damages to activities outside the firm; and (2) these damages must not

be treated as costs in the firm's decision-making (that is, they must not be internalized)" [p.

8].

In applying the textbook treatment of externalities, it must be realized that textbooks

"typically ignore the critical real world problem of inadequate information and the likelihood

that regulatory requirements are set on the basis of criteria other than economic efficiency.

The textbook formulation is not intended to provide prescriptions for specific policies but

rather to provide a conceptual outline of the basic economic issues involved" [p. 11].

"If the government sets standards using other criteria or without complete information,

marginal benefits will not be equated to marginal cost, marginal costs may differ substantially

among sources, and the total cost of pollution reduction will not be minimized" [p. 11].

Environmental Externality Valuation Approaches

Dr. Schmalensee addresses three valuation approaches in his testimony.

Highest cost of control, the approach used by the Tellus Institute (and adopted by the

Massachusetts D.P.U.), bears no "relationship to the marginal cost of control [as presented

in textbooks], let alone to the environmental damage caused by a pollutant. There is no

support for the view that Congress or state legislators have `revealed' through their actions

that residual damages have the values that Tellus has calculated.

There is not a single marginal cost for all relevant sources for a given pollutant,

rather a wide range of marginal costs for different sources.

60

EE-RM-93-801 COMMENT OR12

piecemeal approach to environmental protection, the D.P.U. should address broader 

environmental concerns by promoting least-cost control strategies. 

KEY ISSUES 

The following issues concerning environmental externalities were raised in the direct 

testimony of Dr. Schmalensee. Page citations directly follow all direct quotations from this 

testimony. 

Environmental Externality Policy Options 

In a market economy, when some costs or benefits are not reflected in the prices of goods 

and services, IIproduction decisions are not socially optimal. Environmental effects are in 

many respects the most important example of such 'externalities'" [po 7]. 

Two logically distinct conditions m\lst hold if an externality is to exist: (1) lithe firm's 

activities must create damages to activities outside the firm; and (2) these damages must not 

be treated as costs in the firm's decision-making (that is, they must not be internalize d) II [po 

8]. 

In applying the textbook treatment of externalities, it must be realized that textbooks 

IItypically ignore the critical real world problem of inadequate information and the likelihood 

that regulatory requirements are set on the basis of criteria other than economic efficiency. 

The textbook formulation is not intended to provide prescriptions for specific policies but 

rather to provide a conceptual outline of the basic economic issues involvedll [po 11]. 

IIIf the government sets standards using other criteria or without complete information, 

marginal benefits will not be equated to marginal cost, marginal costs may differ substantially 

among sources, and the total cost of pollution reduction will not be minimized II [po 11]. 

Environmental Externality Valuation Approaches 

Dr. Schmalensee addresses three valuation approaches in his testimony. 

Highest cost of control, the approach used by the Tellus Institute (and adopted by the 

Massachusetts D.P.U.), bears no "relationship to the marginal cost of control [as presented 

in textbooks], let alone to the environmental damage caused by a pollutant. There is no 

support for the view that Congress or state legislators have 'revealed' through their actions 

that residual damages have the values that Tellus has calculated. 

• There is not a single marginal cost for all relevant sources for a given pollutant, 

rather a wide range of marginal costs for different sources. 

60 
Because marginal costs differ across sources, the observed marginal costs of control

do not correspond to the `least cost' marginal curves used in textbooks.

Thus the current regulatory approach does not generate the efficient result in which

marginal cost and marginal benefit are equated (and thus where marginal cost is a

proxy for marginal benefit)" [pp. 18-19].

Given the assumptions that highest cost of control is based on the revealed

preference of legislators and regulators in establishing environmental standards and

that environmental authorities have optimized environmental standards, there is "no

justification for another agency (such as the DPU) imposing additional regulations,

since the `right' sources would have been built and the 'right' controls would have

been imposed" [p. 20].

Residual damage-based approach begins with an "estimation of the willingness of those

affected to pay, per unit of pollution reduction on the margin, to avoid the residual damages

that remain after anticipated controls are in place" [p. 21].

The values, derived'from this residual damage-based approach should be applied to

all sources, not just to electric utilities, so as to avoid a piecemeal approach to

environmental protection.

Because "many of the residual damages will differ a great deal depending upon where

emissions occur," the calculated externality values "should not simply be imported

from other states or regions," should differ for some pollutants "depending upon

where the power plant is located" and "should take into account the regulations that

are already in place to reduce emissions" [pp. 22-23].

These externality values should only be used when residual emissions cause damages

and when these effects are not already internalized in...utility decision-making" [p. 24].

Offset costs is "based upon a least-cost approach that is consistent with efficient

environmental controls" [p. 26]. Although relying on control costs rather than damage

calculations, this approach allows for a market price to be set for the production or

acquisition of offsets -- based upon a societal determination of the appropriate number of

emissions -- that "would represent both the opportunity cost and the value of emissions at

the margin. The result of allowing offsets and using such a price in resource planning would

be to reduce the overall cost of meeting environmental objectives" [pp. 25-26].

Zero Externality Values

Some number for an externality value is not always better than no number. "Even the

theoretically ideal value -- the value of the marginal residual damage -- may be undesirable

on balance because of the `piecemeal problem' and the resulting reactions of sources not

covered by the DPU. Moreover, if the value is too high...the distortions become

61

EE-RM-93-801 COMMENT OR12

Because marginal costs differ across sources, the observed marginal costs of control 

do not correspond to the 'least cost' marginal curves used in textbooks. 

e Thus the current regulatory approach does not generate the efficient result in which 

marginal cost and marginal benefit are equated (and thus where marginal cost is a 

proxy for marginal benefit)" [pp. 18-19]. 

e Given the assumptions that highest cost of control is based on the revealed 

preference of legislators and regulators in establishing environmental standards and 

that environmental authorities have optimized environmental standards, there is "no 

justification for another agency (such as the DPU) imposing additional regulations, 

since the 'right' sources would have been built and the 'right' controls would have 

been imposed" [po 20]. 

Residual damage-based approach begins with an "estimation of the willingness of those 

affected to pay, per unit of pollution reduction on the margin, to avoid the residual damages 

that remain after anticipated controls are in place" [po 21]. 

e The values. derivedJrom this residual damage-based approach should be applied to 

all sources, not just to electric utilities, so as to avoid a piecemeal approach to 

environmental protection. 

e Because "many of the residual damages will differ a great deal depending upon where 

emissions occur,' I the calculated externality values "should not simply be imported 

from other states or regions,'1 should differ for some pollutants "depending upon 

where the power plant is located" and "should take into account the regulations that 

are already in place to reduce emissionsll [pp. 22-23]. 

e These externality values should only be used when residual emissions cause damages 

and when these effects are not already internalized in ... utility decision-making" [po 24]. 

Offset costs is "based upon a least-cost approach that is consistent with efficient 

environmental controlsll [po 26]. Although relying on control costs rather than damage 

calculations, this approach allows for a market price to be set for the production or 

acquisition of offsets -- based upon a societal determination of the appropriate number of 

emissions -- that "would represent both the opportunity cost and the value of emissions at 

the margin. The result of allowing offsets and using such a price in resource planning would 

be to reduce the overall cost of meeting environmental objectives" [pp. 25-26]. 

Zero Externality Values 

Some number for an externality value is not always better than no number. "Even the 

theoretically ideal value -- the value of the marginal residual damage -- may be undesirable 

on balance because of the 'piecemeal problem' and the resulting reactions of sources not 

covered by the DPU. Moreover, if the value is too high ... the distortions become 

61 
disproportionately greater, [potentially leading] to even greater rate increases for existing

customers [and] more pollution" [p. 34].

In light of the provisions of the 1990 Clean Air Act, adding an externality value to sulfur

dioxide that will be produced by new sources in operation over the next 30 years:

® has no basis in economic theory;

constitutes double counting that would, in turn, "distort a utility's choice among

alternate resource plans and lead to costs clearly in excess of those intended by

Congress;" [p. 30] and,

if used on a state only basis, would have "no effect whatsoever on the overall level

of SO2 emissions in the U.S. [but would] raise electricity rates for [state] ratepayers

and drive down the price of allowances, thereby reducing the cost of electricity and

increasing SO2 emissions in other parts of the country" [p. 30].

Interim CO2 Externality Values

It does not make environmental or economic sense to apply a large "externality value" for

CO2 emissions in Massachusetts.

Doing so would be inconsistent with the international nature of potential global

warming damages. Any reductions in CO2 emissions in Massachusetts due to the

`externality value' would have virtually no benefits to Massachusetts residents.

The logic of using existing legislation and regulations to indicate the "revealed

preference' for `externality values' would mean that the value should be zero, both

in Massachusetts and the United States. No controls have yet been imposed.

"Instituting a large CO2 adder in Massachusetts would send the wrong signals to

Washington officials searching for a coherent national (and international) strategy for

responding to the possibility of global warming" [p. 31].

In anticipation of future regulatory action on CO2 emissions, a modest externality

value might encourage utilities to cost-effectively address CO2 levels in the selection

of the type of plant needed to meet new capacity requirements.

Potential PUC Conflicts/Disadvantages

The Massachusetts DPU faces "four major difficulties in instituting `externality values' in the

IRM process:

62

EE-RM-93-801 COMMENT OR12

disproportionately greater, [potentially leading] to even greater rate increases for existing 

customers [and] more pollution" [po 34]. 

In light of the provisions of the 1990 Clean Air Act, adding an externality value to sulfur 

dioxide that will be produced by new sources in operation over the next 30 years: 

@ has no basis in economic theory; 

constitutes double counting that would, in turn, "distort a utility's choice among 

alternate resource plans and lead to costs clearly in excess pf those intended by 

Congress;" [po 30] and, 

@ if used on a state only basis, would have "no effect whatsoever on the overall level 

of S02 emissions in the U.S. [but would] raise electricity rates for [state] ratepayers 

and drive down the price of allowances, thereby reducing the cost of electricity and 

increasing S02 emissions in other parts of the country" [po 30]. 

Interim CO2 Externality Values 

It does not make environmental or economic sense to apply a large "externality value" for 

CO2 emissions in Massachusetts. 

EO Doing so would be inconsistent with the international nature of potential global 

warming damages. Any reductions in CO2 emissions in Massachusetts due to the 

'externality value' would have virtually no benefits to Massachusetts residents. 

EO The logic of using existing legislation and regulations to indicate the' 'revealed 

preference' for 'externality values' would mean that the value should be zero, both 

in Massachusetts and the United States. No controls have yet been imposed. 

"Instituting a large CO2 adder in Massachusetts would send the wrong signals to 

Washington officials searching for a coherent national (and international) strategy for 

responding to the possibility of global warming" [po 31]. 

EO In anticipation of future regulatory action on CO2 emissions, a modest externality 

value might encourage utilities to cost-effectively address CO2 levels in the selection 

of the type of plant needed to meet new capacity requirements. 

Potential PUC Conflicts/Disadvantages 

The Massachusetts DPU faces "four major difficulties in instituting 'externality values' in the 

IRM process: 

62 
Limited source coverage ('piecemeal' problem). The scope of the DPU's authority

is limited to utility sources; but there are many other sources for the major

environmental contaminants.

Duplication. The DPU may establish ` externality values' for damages that are already

internalized as a result of other regulations or other institutions , thus imposing costs

out of proportion to any benefits that might be obtained.

Counterproductive conflicts in policies. The 'externality values' established by the

DPU may conflict with the environmental policies set by other agencies and may also

conflict with other DPU policy objectives.

Limited expertise. Environmental agencies have spent decades building up their

expertise in environmental areas -- including the relevant science, engineering,

economics and law -- and the DPU cannot duplicate this expertise without sacrificing

other important missions" [p. 33].

SUPPORTING DOCUMENTATION

None cited.

63

EE-RM-93-801 COMMENT OR12

Limited source coverage ('piecemeal' problem). The scope of the DPU's authority 

is limited to utility sources; but there are many other sources for the major 

environmental contaminants. 

• Duplication. The DPU may establish 'externality values' for damages that are already 

internalized as a result of other regulations or other institutions, thus imposing costs 

out of proportion to any benefits that might be obtained. 

Counterproductive conflicts in policies. The 'externality values' established by the 

DPU may conflict with the environmental policies set by other agencies and may also 

conflict with other DPU policy objectives. 

Limited expertise. Environmental agencies have spent decades building up their 

expertise in environmental areas -- including the relevant science, engineering, 

economics and law -- and the DPU cannot duplicate this expertise without sacrificing 

other important missions" [po 33]. 

SUPPORTING DOCUMENTATION 

None cited. 

63 
SOUTHERN CALIFORNIA EDISON COMP

P.O. Box 800

2244 Walnut Grove Avenue

Rosemead, California 91770

PROFILE

Southern California Edison Company is in investor-owned electricity utility.

TESTIMONY REFERENCED

"Testimony of the Southern California Edison Company on Group 1 Hearing Issues: Air

Quality, 1992 Electricity Report," California Energy Commission, Docket No. 90-ER-92,

November 19, 1991.

STATE REGULATORY ISSUE ADD RESSED

The California Energy Commission (CEC) is examining appropriate goals for valuing

residual air emissions and mechanisms for applying these values in its 1992 Electricity

Report (ER 92).

SUMMARY OF CONCLUSIONS

The Southern California Edison Company recommends that the California Energy

Commission abandon its use of the control cost approach and adopt a damage-based

method for valuing residual emissions in the 1992 Electricity Report. The company proposes

that damage-based values be used for nitrous oxides (NOX), reactive organic gases (ROG)

and particulate matter (PM10) and a zero value be used for carbon dioxide (CO2). Values

for SO2 are awaiting the completion of a commissioned study by the National Economic

Research Associates, and no value is recommended for methane (CH4). Pollution offsets

should be valued within a range of $2,700 to $22,000 with an average of $12,000.

KEY ISSUES

The following issues concerning environmental externalities were raised in the resource

assumptions testimony of the Southern California Edison Company ("Edison"). Page

citations directly follow all direct quotations from this testimony.

64

EE-RM-93-801 COMMENT OR12

PROFILE 

SOUTHERN CALIFORNIA EDISON COMPANY 

P.O. Box 800 

2244 Walnut Grove Avenue 

Rosemead, California 91770 

Southern California Edison Company is in investor-owned electricity utility. 

TESTIMONY REFERENCED 

"Testimony of the Southern California Edison Company on Group 1 Hearing Issues: Air 

Quality, 1992 Electricity Report," California Energy Commission, Docket No. 90-ER-92, 

November 19, 1991. 

STATE REGULATORY ISSUE ADDRESSED 

The California Energy Commission (CEC) is exammmg appropriate goals for valuing 

residual air emissions and mechanisms for applying these values in its 1992 Electricity 

Report (ER 92). 

SUMMARY OF CONCLUSIONS 

The Southern California Edison Company recommends that the California Energy 

Commission abandon its use of the control cost approach and adopt a damage-based 

method for valuing residual emissions in the 1992 Electricity Report. The company proposes 

that damage-based values be used for nitrous oxides (NOx), reactive organic gases (ROG) 

and particulate matter (PMlO) and a zero value be used for carbon dioxide (C02), Values 

for S02 are awaiting the completion of a commissioned study by the National Economic 

Research Associates, and no value is recommended for methane (CH4). Pollution offsets 

should be valued within a range of $2,700 to $22,000 with an average of $12,000. 

KEY ISSUES 

The following issues concerning environmental externalities were raised in the resource 

assumptions testimony of the Southern California Edison Company ("Edison"). Page 

citations directly follow all direct quotations from this testimony. 

64 
Environmental Externality Policy Options

Edison recommends that the use of monetized values for residual emissions be confined to

the planning process "in selecting which resources to add once the need for new resources

has been determined based on direct costs to utility ratepayers" [p. 8].

The following guidelines are suggested for the proper application of residual emission values.

Determine those emissions that remain after controls are in place (i.e., residual

emissions).

® Assess internalization so as to avoid double counting.

Apply appropriate values using a range of damage-based values so as to reflect the

associated uncertainty.

Determine the effects of applying monetized values on emissions reductions and

resource costs as well as such unintended effects as the "piecemeal" problem.

Environmental Externality Valuation Approaches

Edison addresses valuation methods within the context of two policy tools used to meet

environmental objectives.

Valuing residual emissions. It is important to use a correct method to value residual

emissions. Edison discusses four monetization methods.

Damage-based valuation of residual emissions is the method supported by Edison. "Under

the damage function approach, values are set by determining the dollar value per ton of

damages for each of the relevant pollutants" [p. 10]. In contrast, the "use of cost-based

values can lead both to higher costs than necessary to meet environmental targets and to

potential adverse effects on environmental quality" [p. 7].

Revealed preference is an approach that uses the cost of controlling emissions to infer the

value that society, as revealed through the actions of legislators and regulators, places on the

damages from residual emissions. This approach is problematic because "relevant statutes

do not require (or even allow) such balancing of marginal costs and marginal benefits;

control costs are not based upon the least-cost means of achieving emissions reductions; and

marginal costs differ dramatically across different air quality regulations" [p. 21]. Therefore,

"Edison recommends that the CEC recognize the inherent flaw of the control cost approach

and abandon it in favor of the damage-based approach" [p. 22].

Resource cost savings is a method that uses control costs to value residual emissions. The

cost of control could be used to value the cost savings should the application of monetized

values for emissions result in reduced emissions and the ability to relax rules. This is "the

65

EE-RM-93-801 COMMENT OR12

Environmental Externality Policy Options 

Edison recommends that the use of monetized values for residual emissions be confined to 

the planning process "in selecting which resources to add once the need for new resources 

has been determined based on direct costs to utility ratepayers" [po 8]. 

The following guidelines are suggested for the proper application of residual emission values. 

<II Determine those emissions that remain after controls are in place (i.e., residual 

emissions ). 

<II Assess internalization so as to avoid double counting. 

Apply appropriate values using a range of damage-based values so as to reflect the 

associated uncertainty. 

Determine the effects of applying monetized values on emissions reductions and 

resource costs as well as such unintended effects as the "piecemeal" problem. 

Environmental Externality Valuation Approaches 

Edison addresses valuation methods within the context of two policy tools used to meet 

environmental objectives. 

Valuing residual emissions. It is important to use a correct method to value residual 

emissions. Edison discusses four monetization methods. 

Damage-based valuation of residual emissions is the method supported by Edison. "Under 

the damage function approach, values are set by determining the dollar value per ton of 

damages for each of the relevant pollutants" [po 10]. In contrast, the "use of cost-based 

values can lead both to higher costs than necessary to meet environmental targets and to 

potential adverse effects on environmental quality" [po 7]. 

Revealed preference is an approach that uses the cost of controlling emissions to infer the 

value that society, as revealed through the actions of legislators and regulators, places on the 

damages from residual emissions. This approach is problematic because "relevant statutes 

do not require (or even allow) such balancing of marginal costs and marginal benefits; 

control costs are 110t based upon the least-cost means of achieving emissions reductions; and 

marginal costs differ dramatically across different air quality regulations" [po 21]. Therefore, 

"Edison recommends that the CEC recognize the inherent flaw of the control cost approach 

and abandon it in favor of the damage-based approach" [po 22]. 

Resource cost savings is a method that uses control costs to value residual emissions. The 

cost of control could be used to value the cost savings should the application of monetized 

values for emissions result in reduced emissions and the ability to relax rules. This is "the 

65 
only credible argument for using control costs as a measure of the value of residual

emissions" [p. 23].

Permits market is the approach Edison believes is the best way to meet environmental

objectives at least possible costs. "The damages from residual emissions would then be

reflected, at the margin, in the prices of emissions permits or the fee charged. These costs

in turn become like ordinary production costs that firms take into account when they choose

what to produce, how to produce it, and what to charge" [p. 3]. Residual valuations based

on marketable permits cannot yet be made since there has not been a market established

for emissions other than SOX.

Edison recommends the use of damage-based externality values developed in a study it

commissioned. The preliminary results of the National Economic Research Associates study,

along with a comparison of valuations based on other valuation methods, are summarized

in the following table.

COMPARISON OF ALTERNATIVE METHODS FOR

RESIDUAL EMISSIONS VALUATION

SOUTH COAST AIR QUALITY MANAGEMENT DISTRICT

(1989 dollars/ton)

Valuation Method NOX ROG PM10

a gge;= lase :...:.:.::...::..

Edison Preliminary (ER-92)

- Low

- Mid-range

- High

1,500

3,100

9,000

100

800

3,200

3,900

6.900

17,100

SCAQMD 1991 14,400 4,800 28,300

SCAQMD 1988 4,200 1,600 7,900

CEC Staff (ER-92) Marginal Cost 24,500 16,200 26,600

CPUC BRPU Marginal Cost 26,400 18,900 5,700

CEC Staff (ER-92) Average Cost 13,100 8,800 11,900

....................... ......... .............

rket'-:

... .............

iâasee

........................

Offset Requirements. This requires the reduction of emissions equal to or greater than the

addition of emissions resulting from additional generating capacity. Offsets can be obtained

from within the utility, provided by public policy or purchased on the market. If additional

capacity must be offset by more than one ton for every ton from new capacity, then

emissions should decrease as the result of added capacity. "Thus, where offsets are used,

66

EE-RM-93-801 COMMENT OR12

only credible argument for using control costs as a measure of the value of residual 

emissions" [po 23]. 

Permits market is the approach Edison believes is the best way to meet environmental 

objectives at least possible costs. "The damages from residual emissions would then be 

reflected, at the margin, in the prices of emissions permits or the fee charged. These costs 

in turn become like ordinary production costs that firms take into account when they choose 

what to produce, how to produce it, and what to charge" [po 3]. Residual valuations based 

on marketable permits cannot yet be made since there has not been a market established 

for emissions other than SOx' 

Edison recommends the use of damage-based externality values developed in a study it 

commissioned. The preliminary results of the National Economic Research Associates study, 

along with a comparison of valuations based on other valuation methods, are summarized 

in the following table. 

COMPARISON OF ALTERNATIVE METHODS FOR 

RESIDUAL EMISSIONS VALUATION 

SOUTH COAST AIR QUALITY MANAGEMENT DISTRICT 

(1989 dollars/ton) 

Edison Preliminary (ER-92) 

- Low 1,500 100 3,900 

- Mid-range 3,100 800 6.900 

- High 9,000 3,200 17,100 

SCAQMD 1991 14,400 4,800 28,300 

SCAQMD 1988 4,200 1,600 7,900 

CEC Staff (ER-92) Marginal Cost 24,500 16,200 26,600 

CPUC BRPU Marginal Cost 26,400 18,900 5,700 

CEC Staff (ER-92) Average Cost 

==.+== 

13,100 8,800 11,900 

-.. ~ 

Offset Requirements. This requires the reduction of emissions equal to or greater than the 

addition of emissions resulting from additional generating capacity. Offsets can be obtained 

from within the utility, provided by public policy or purchased on the market. If additional 

capacity must be offset by more than one ton for every ton from new capacity, then 

emissions should decrease as the result of added capacity. "Thus, where offsets are used, 

66 
there are no residual emissions due to added capacity and therefore no residual emissions

values need to be calculated" [p. 6].

The future of offset prices is uncertain. "The price of electricity should not be impacted [in

the forecast period] enough by the price of offsets to reduce the economic feasibility of using

electrification as an emissions reduction strategy" [p. 26]. "A major uncertainty affecting

prices is the continuous change in regulations, and regulatory interpretations, concerning the

need for offsets"[p.25].

Currently, costs of offsets are lower than costs of control since most offsets come from plant

shutdowns. The cost difference is expected to diminish with the passage of time as "major

emission sources have closed down, and remaining sources are retrofit with controls, fewer

offsets will be available from shutdowns" [p. 25].

Scope of Environmental Externality Valuations

The company proposes that costs of reducing emissions through new resource additions be

compared to the costs of other measures, in addition to generation. The comparative data

on residual valuations would be incorporated into four distinct resource plans.

1. Resource plan based on direct costs, which uses "the prescribed methodology with

generation resources added to maintain system reliability and to reduce electricity

production costs" [p. 8].

2. Resource plan based on limited set of environmental measures encompasses the same

factors as the first plan, but adds the costs associated with residual air emissions (i.e.,

those not offset or internalized).

3. Resource plan based on broad set of environmental measures is designed to reduce

the costs of achieving residual air emissions reduction by substituting more

cost-effective measures than those included in the second resource plan.

4. Preferred resource plan takes into account other environmental effects (e.g., land use

and endangered species) and other resource planning objectives (e.g., energy

efficiency, reliability, electricity cost, flexibility and renewable resource development).

There are five stated advantages of this proposed resource planning process.

1. The extent to which generation resources are an appropriate means for achieving

improved air quality is identified as are the comparative costs and benefits of

potential new resources versus other measures.

2. Environmental quality is recognized as one of many resource planning objectives.

3. A means for explicitly including judgment in resource planning is provided.

67

EE-RM-93-801 COMMENT OR12

there are no residual emissions due to added capacity and therefore no residual emissions 

values need to be calculated" [po 6]. 

The future of offset prices is uncertain. "The price of electricity should not be impacted [in 

the forecast period] enough by the price of offsets to reduce the economic feasibility of using 

electrification as an emissions reduction strategy" [po 26]. "A major uncertainty affecting 

prices is the continuous change in regulations, and regulatory interpretations, concerning the 

need for offsets"[p.25]. 

Currently, costs of offsets are lower than costs of control since most offsets come from plant 

shutdowns. The cost difference is expected to diminish with the passage of time as "major 

emission sources have closed down, and remaining sources are retrofit with controls, fewer 

offsets will be available from shutdowns" [po 25]. 

Scope of Environmental Externality Valuations 

The company proposes that costs of reducing emissions through new resource additions be 

compared to the costs of other measures, in addition to generation. The comparative data 

on residual valuations would be incorporated into four distinct resource plans. 

1. Resource plan based on direct costs, which uses "the prescribed methodology with 

generation resources added to maintain system reliability and to reduce electricity 

production costs" [po 8]. 

2. Resource plan based on limited set of environmental measures encompasses the same 

factors as the first plan, but adds the costs associated with residual air emissions (i.e., 

those not offset or internalized). 

3. Resource plan based on broad set of environmental measures is designed to reduce 

the costs of achieving residual air emissions reduction by substituting more 

cost-effective measures than those included in the second resource plan. 

4. Preferred resource plan takes into account other environmental effects (e.g., land use 

and endangered species) and other resource planning objectives ( e.g., energy 

efficiency, reliability, electricity cost, flexibility and renewable resource development). 

There are five stated advantages of this proposed resource planning process. 

1. The extent to which generation resourc~s are an appropriate means for achieving 

improved air quality is identified as are the comparative costs and benefits of 

potential new resources versus other measures. 

2. Environmental quality is recognized as one of many resource planning objectives. 

3. A means for explicitly including judgment in resource planning is provided. 

67 
4. Results of analytical resource planning methods are incorporated into the

development of the Preferred Resource Plan.

5. Discussion and debate is focused on policy issues, with the analytical results used as

supporting information.

Potential PITC Conflicts/Disadvantages

Agencies should apply regulations consistently across all sources of emissions within a

relevant region. If implemented on a piecemeal basis, such environmental regulation can

result in higher costs than necessary, lead to higher levels of pollution, produce regulatory

conflict and adversely impact competitiveness.

"If emissions from only part of an industry or economy are regulated, the unregulated

parts will tend to expand more rapidly, and those expansions could lead to greater

pollution levels" [p. 4].

"Stringent regulations on utilities' emissions could cause large increases in utility rates,

which would encourage customers with the ability to bypass the system to do so. Not

only would this lead to even greater rates for existing customers; it might also lead

to more pollution if less stringently-controlled boilers were used to generate

electricity" [p. 5].

Conflicts between regulatory districts can arise if the regulatory requirements are not

coordinated among agencies. These conflicts would occur for utilities with only

limited jurisdiction over generation sources.

Competitiveness in national and international markets could be lost by raising the

cost of doing business in the regulated area.

In some cases, such as when offsets are required or where marketable permits have been

purchased, utilities already internalize the cost of environmental emissions in their resource

planning processes. It would be double counting to add PUC-imposed monetized externality

values to emissions from these sources.

Zero Externality Values

"The fact that the United States does not (yet) have regulations governing GHG [greenhouse

gas] emissions means that the `revealed preference' approach would assign a zero value to

GHG emissions. Edison recommends that GHG emissions be valued at zero at the present

time because -- absent equivalent commitments on the part of other jurisdictions -- reducing

GHG emissions in California will lead to no perceptible gains to California residents" [p. 28].

68

EE-RM-93-801 COMMENT OR12

4. Results of analytical resource planning methods are incorporated into the 

development of the Preferred Resource Plan. 

5. Discussion and debate is focused on policy issues, with the analytical results used as 

supporting information. 

Potential PUC Conflicts/Disadvantages 

Agencies should apply regulations consistently across all sources of emissions within a 

relevant region. If implemented on a piecemeal basis, such environmental regulation can 

result in higher costs than necessary, lead to higher levels of pollution, produce regulatory 

conflict and adversely impact competitiveness. 

"If emissions from only part of an industry or economy are regulated, the unregulated 

parts will tend to expand more rapidly, and those expansions could lead to greater 

pollution levels II [po 4]. 

"Stringent regulations on utilities' emissions could cause large increases in utility rates, 

which would encourage customers with the ability to bypass the system to do so. Not 

only would this lead to even greater rates for existing customers; it might also lead 

to more pollution if less stringently-controlled boilers were used to generate 

electricity II [po 5]. 

Conflicts between regulatory districts can arise if the regulatory requirements are not 

coordinated among agencies. These conflicts would occur for utilities with only 

limited jurisdiction over generation sources. 

Competitiveness in national and international markets could be lost by raising the 

cost of doing business in the regulated area. 

In some cases, such as when offsets are required or where marketable permits have been 

purchased, utilities already internalize the cost of environmental emissions in their resource 

planning processes. It would be double counting to add PUC-imposed monetized externality 

values to emissions from these sources. 

Zero Externality Values 

liThe fact that the United States does not (yet) have regulations governing GHG [greenhouse 

gas] emissions means that the 'revealed preference' approach would assign a zero value to 

GHG emissions. Edison recommends that GHG emissions be valued at zero at the present 

time because -- absent equivalent commitments on the part of other jurisdictions -- reducing 

GHG emissions in California will lead to no perceptible gains to California residents" [po 28]. 

68 
Edison also recommends the use of zero externality values for in-state attainment areas

given that the National Ambient Air Quality Standards for emissions are set well below

those shown to impact human health.

Interim CO2 Externality Values

An efficient policy directed toward the reduction of greenhouse gas emissions should be

comprehensive in that the values should be extended to non-utility emissions and that

emissions other that CO2 should be available as offsets.

Edison suggests that, in order to "consider possible damages and to anticipate future

regulation" [p. 28], the $2.00 per ton of CO2 estimate of Dr. Nordhaus may be appropriate.

"The use of a damage-based figure for CO2 should be accompanied by a policy that allows

utilities to offset their emissions by finding reductions in CO2 or other GHG emissions in

other regions or other sectors of the economy" [p. 28].

SUPPORTING DOCUMENTATION

Appendix A of the testimony contains source information used for the calculation of

preliminary damage-based estimates. Appendix B is an article reprint, cited as follows.

Nordhaus, William D. "To Slow or Not to Slow: The Economics of the Greenhouse Effect,"

The Economic Journal, July 1991.

69

EE-RM-93-801 COMMENT OR12

Edison also recommends the use of zero externality values for in-state attainment areas 

given that the National Ambient Air Quality Standards for emissions are set well below 

those shown to impact human health. 

Interim CO2 Externality Values 

An efficient policy directed toward the reduction of greenhouse gas emissions should be 

comprehensive in that the values should be extended to non-utility emissions and that 

emissions other that CO2 should be available as offsets. 

Edison suggests that, in order to "consider possible damages and to anticipate future 

regulation" [po 28], the $2.00 per ton of CO2 estimate of Dr. Nordhaus may be appropriate. 

"The use of a damage-based figure for CO2 should be accompanied by a policy that allows 

utilities to offset their emissions by finding reductions in CO2 or other GHG emissions in 

other regions or other sectors of the economy" [po 28]. 

SUPPORTING DOCUMENTATION 

Appendix A of the testimony contains source information used for the calculation of 

preliminary damage-based estimates. Appendix B is an article reprint, cited as follows. 

Nordhaus, William D. "To Slow or Not to Slow: The Economics ofthe Greenhouse Effect," 

The Economic Journal, July 1991. 

69 
WILLIAM L. STILLINGER

Northeast Utilities Service Company

107 Selden Street

Berlin, Connecticut 06037

PROFILE

Mr. Stillinger is Director of System Planning for Northeast Utilities Service Company

(NUSCO), a position he had held since 1987. Prior to joining the subsidiary of Northeast

Utilities, he served as a generation planning engineer with the New England Power Pool

and with the American Electric Power Service Corporation in the area of transmission

planning.

TESTIMONY REFERENCED

"Direct Testimony of William L. Stillinger on Behalf of Western Massachusetts Electric

Company in the Investigation by the Department on its Own Motion as to the

Environmental Externality Values to be Used in Resource Cost-Effectiveness Tests by

Electric Companies Subject to the Department's Jurisdiction," Massachusetts Department

of Public Utilities Docket No. D.P.U. 91-131, October 1991.

STATE REGULATORY ISSUE ADDRESSED

Under its Order on Integrated Resource Management (IRM), the Massachusetts

Department of Public Utilities (D.P.U.) directs electric utilities to consider all air, water,

solid waste and spent fuel disposal impacts resulting from plant operation in the resource

evaluation process. In addition, D.P.U. Order 89-239 prescribes monetized environmental

externality values for eight air pollutants (CO2, CH41 CO, N20, NOR, SO2, TSPs and VOCs)

that are to be incorporated into the electric utility IRM process.

SUMMARY OF CONCLUSIONS

Mr. Stillinger presents two key conclusions. First, defensible environmental externality

adders, based on residual damage costs, can be used in evaluating the costs of resource

options. However, if used beyond that application, adders can lead to serious economic

distortions. Second,' implementation plans for NOR, and potentially for CO2, may require

that electric utilities make use of offsetting techniques as an adjunct to installing control

equipment.

70

EE-RM-93-801 COMMENT OR12

PROFILE 

WILLIAM L. STILLINGER 

Northeast Utilities Service Company 

107 Selden Street 

Berlin, Connecticut 06037 

Mr. Stillinger is Director of System Planning for Northeast Utilities Service Company 

(NUSCO), a position he had held since 1987. Prior to joining the subsidiary of Northeast 

Utilities, he served as a generation planning engineer with the New England Power Pool 

and with the American Electric Power Service Corporation in the area of transmission 

planning. 

TESTIMONY REFERENCED 

"Direct Testimony of William L. Stillinger on Behalf of Western Massachusetts Electric 

Company in the Investigation by the Department on its Own Motion as to the 

Environmental Externality Values to be Used in Resource Cost-Effectiveness Tests by 

Electric Companies Subject to the Department's Jurisdiction," Massachusetts Department 

of Public Utilities Docket No. D.P.U. 91-131, October 1991. 

STATE REGULATORY ISSUE ADDRESSED 

Under its Order on Integrated Resource Management (IRM), the Massachusetts 

Department of Public Utilities (D.P.U.) directs electric utilities to consider all air, water, 

solid waste and spent fuel disposal impacts resulting from plant operation in the resource 

evaluation process. In addition, D.P.U. Order 89-239 prescribes monetized environmental 

externality values for eight air pollutants (C02, CH4, CO, N20, NOx, S02' TSPs and VOCs) 

that are to be incorporated into the electric utility IRM process. 

SUMMARY OF CONCLUSIONS 

. Mr. Stillinger presents two key conclusions. First, defensible environmental externality 

adders, based on residual damage costs, can be used in evaluating the costs of resource 

options .. However, if used beyond that application, adders can lead to serious economic 

distortions. Second,' implementation plans for NOx, and potentially for CO2, may require 

that electric utilities make use of offsetting techniques as an adjunct to installing control 

equipment. 

70 
ISSUES

The following issues concerning environmental externalities were raised in the direct

testimony of Mr. Stillinger. Page citations directly follow all direct quotations from this

testimony.

Scope of Monetized Environ mental Externalities

Monetized environmental externalities should only be used for evaluating the costs of new

resources because "externality costs are (by definition) not part of the `hard dollar' or market

costs of resources. These adders are not capable of accurately measuring the comparative

environmental benefits of resources" [pp. 17-18].

"Using the externality adders in most analyses related to electric utility planning and

operations, such as generation dispatch, setting rate levels and rate design, near term

purchase/sales decisions, or the evaluation of existing resources can lead to undesirable, if

not absurd, results" [p. 18].

Environmental Dispatch

Regional power pool dispatch, using environmental adders to the generating units' fuel

prices, "would be virtually impossible to implement, even if we assume that the utilities and

regulators in the six New England states could agree on the same set of externality adders

to use" [p. 31].

Environmental dispatch may disrupt the coordinated operation of the integrated electric

power system, while imposing operating constraints that may be incompatible with the

transmission system design.

Impacts on DSM Resource Options

A paper prepared on the work conducted by the MIT Energy Laboratory as part of the

Analysis Group for Regional Electricity Alternatives project concluded that "[s]ince the New

England system has a great deal of old, inefficient, oil-fired capacity, least-cost planning

approaches that substitute investments in demand-side management for new, efficient power

plant investments lead to higher aggregate emissions for some major pollutants. This

suggests that technology-based pollution externality `adders' favoring demand-side

management might be a poor way of structuring `least social cost' planning. Instead, such

social costs should be calculated at the system or portfolio level" [p. 29].

71

EE-RM-93-801 COMMENT OR12

KEY ISSUES 

The following issues concerning environmental externalities were raised in the direct 

testimony of Mr. Stillinger. Page citations directly follow all direct quotations from this 

testimony. 

Scope of Monetized Environmental Externalities 

Monetized environmental externalities should only be used for evaluating the costs of new 

resources because "externality costs are (by definition) not part of the 'hard dollar' or market 

costs of resources. These adders are not capable of accurately measuring the comparative 

environmental benefits of resources" [pp. 17-18]. 

"Using the externality adders in most analyses related to electric utility planning and 

operations, such as generation dispatch, setting rate levels and rate design, near term 

purchase/sales decisions, or the evaluation of existing resources can lead to undesirable, if 

not absurd, results" [po 18]. 

Environmental Dispatch 

Regional power pool dispatch, using environmental adders to the generating units' fuel 

prices, "would be virtually impossible to implement, even if we assume that the utilities and 

regulators in the six'New England states could agree on the same set of externality adders 

to use" [po 31]. 

Environmental dispatch may disrupt the coordinated operation of the integrated electric 

power system, while imposing operating constraints that may be incompatible with the 

transmission system design. 

Impacts on DSM Resource Options 

A paper prepared on the work conducted by the MIT Energy Laboratory as part of the 

Analysis Group for Regional Electricity Alternatives project concluded that "[s]ince the New 

England system has a great deal of old, inefficient, oil-fired capacity, least-cost planning 

approaches that substitute investments in demand-side management for new, efficient power 

plant investments lead to higher aggregate emissions for some major pollutants. This 

suggests that technology-based pollution externality 'adders' favoring demand-side 

management might be a poor way of structuring 'least social cost' planning. Instead, such 

social costs should be calculated at the system or portfolio level" [po 29]. 

71 
Constraints on Quantification/Monetization

The monetized values set by the Massachusetts D.P.U. present a number of difficulties.

® "Environmental adders silently and incorrectly assume that additional reductions in

pollution always provide a net benefit to society.

® Applying environmental adders (in ways beyond tallying a resource option' s costs)

violates principles of economic theory.

® Control costs are not a reasonable proxy for damage costs.

® Environmental considerations have long been considered in least cost planning.

Applying environmental adders (in ways beyond tallying a resource option's costs) can

run counter to a utility's need to remain competitive with alternate forms of power

supply" [pp. 19-20].

SUPPORTING DOCUMENTATION

Andrews, Clinton J.. et al. "Assessing the Tradeoffs Between Environment, Cost and

Reliability: Developing a Coordinated Strategy to Ensure New England's Electricity Supply."

MIT Energy Laboratory, May 1990.

72

EE-RM-93-801 COMMENT OR12

Constraints on Quantification/Monetization 

The monetized values set by the Massachusetts D.P.U. present a number of difficulties. 

e "Environmental adders silently and incorrectly assume that additional reductions in 

pollution always provide a net benefit to society. 

e Applying environmental adders (in ways beyond tallying a resource option's costs) 

violates principles of economic theory. 

e Control costs are not a reasonable proxy for damage costs. 

Environmental considerations have long been considered in least cost planning. 

Applying environmental adders (in ways beyond tallying a resource option's costs) can 

run counter to a utility's need to remain competitive with alternate forms of power 

supply" [pp. 19-20]. 

SUPPORTING DOCUMENTATION 

Andrews, Clinton J. . et al. "Assessing the Tradeoffs )3etween Environment, Cost and 

Reliability: Developing a Coordinated Strategy to Ensure New England's Electricity Supply." 

MIT Energy Laboratory, May 1990. ' 

72 
U.S. DEPARTMENT OF ENERGY

1000 Independence Avenue, SW

Washington, D.C. 20585

PROFILE

The U.S. Department of Energy (DOE) is an agency of the federal government. As part

of the National Energy Strategy, DOE is expanding its program to provide financial

assistance, technical data and evaluation criteria to assist States and utilities in developing

effective for integrated resource planning and demand-side management programs.

TESTIMONY REFERENCED

"Comments of the United States Department of Energy" to the Texas Public Service

Commission, Project No. 10780, March 23,1992 and "Reply Comments of the United States

Department of Energy" to the Texas Public Service Commission, Project No. 10780, April

13, 1992.

STATE REGULATORY ISSUE ADDRESSED

The Texas Public Utility Commission is amending its rules regulating electric utilities.

Among the issues addressed is the consideration of environmental externalities.

SUMMARY OF CONCLUSIONS

The U.S. Department of Energy prefers the use of damage-based cost estimates over other

methods for valuing environmental externalities. Environmental externality valuations are

appropriately applied to the resource selection process only after all alternatives are

considered (i.e., net system impact). Externality valuations should be applied equally over

all sources of emissions so as not to distort resource prices and competitive situations

between energy supply sources.

KEY ISSUES

The following issues concerning environmental externalities were raised in the two DOE

submissions. Page citations directly follow all direct quotations. The notation "C" following

the page number indicates quotations taken from the Comments submitted; "RC" indicates

those from the Reply Comments.

73

EE-RM-93-801 COMMENT OR12

PROFILE 

U.S. DEPARTMENT OF ENERGY 

1000 Independence Avenue, SW 

Washington, D.C. 20585 

The U.S. Department of Energy (DOE) is an agency of the federal government. As part 

of the National Energy Strategy, DOE is expanding its program to provide financial 

assistance, technical data and evaluation criteria to assist States and utilities in developing 

effective for integrated resource planning and demand-side manageme~t programs. 

TESTIMONY REFERENCED 

"Comments of the United States Department of Energy" to the Texas Public Service 

Commission, Project No. 10780, March 23, 1992 and "Reply Comments of the United States 

Department of Energy" to the Texas Public Service Commission, Project No. 10780, April 

13, 1992. 

STATE REGULATORY ISSUE ADDRESSED 

The Texas Public Utility Commission is amending its rules regulating electric utilities. 

Among the issues addressed is the consideration of environmental externalities. 

SUMMARY OF CONCLUSIONS 

The U.S. Department of Energy prefers the use of damage-based cost estimates over other 

methods for valuing environmental externalities. Environmental externality valuations are 

appropriately applied to the resource selection process only after all alternatives are 

considered (i.e., net system impact). Externality valuations should be applied equally over 

all sources of emissions so as not to distort resource prices and competitive situations 

between energy supply sources. 

KEY ISSUES 

The following issues concerning environmental externalities were raised in the two DOE 

submissions. Page citations directly follow all direct quotations. The notation "c" following 

the page number indicates quotations taken from the Comments submitted; "RC" indicates 

those from the Reply Comments. 

73 
Environmental Externality Policy Options

As a policy option for meeting environmental goals, "it is appropriate for rate regulators,

with responsibility for approving methods of meeting demand growth, to utilize

environmental externality measures to help inform them in making these determinations"

[p.30C].

Environmental Externality Valuation Methods

"Damage measurements should be utilized for establishing externality values. Other, `proxy'

measures -- such as the highest marginal cost of control method -- are unlikely to have any

relationship to damages. Since damages are the principal aspect of environmental

externalities, the focus should be on such impacts, even though there likely will be some

unanswered questions " [p. 23C].

Most values in a table presented by the Environmental Defense Fund in the Texas

proceedings are based on the Tellus Institute and Pace studies and show differences among

values for specific externalities to "differ by as much as 16 to 1 " [p.10RC]. "DOE, in its

testimony presented before the Massachusetts Department of Public Utilities, pointed out

the serious flaws in these two studies " [p. 11RC].

Highest cost of control "is not accepted by many experts, because it produces externality

values that have no relationship to damage costs" [p. 11RC].

Scope of Monetized Environmental Externalities

"If externality values are applied across the board to all options ; and if offsets are allowed

and are taken into account in evaluating options -- then DOE believes that externality values

have the potential to be useful " [p. 28C].

"Before applying any externality values it might adopt, DOE recommends that the

Commission consider the `net system impact' of the various alternatives under consideration

as methods of meeting a demand growth increment. Often, these alternatives -- both

conservation/load management as well as supply options -- will have different capacity

factors. Those with higher capacity factors will displace more existing generation, when they

come into service, than those with lower capacity factors. Since existing generation emits

pollutants, there will be, for each pollutant, a net system impact (NSI) for each alternative

under consideration. The NSI will consist of (1) the increase in pollution from the new

alternative, minus (2) the decrease in pollution from existing generators which operate less

often because of the new addition to the electricity system" [p. 21C].

DOE contends that if insufficient data exist to develop a quantitative value for residual

pollutant emissions impacts, "a qualitative value should not be used as an alternative. Use

of a qualitative value could unjustifiably distort any integrated resource planning process" [p.

22C].

74

EE-RM-93-801 COMMENT OR12

Environmental Externality Policy Options 

As a policy option for meeting environmental goals, "it is appropriate for rate regulators, 

with responsibility for approving methods of meeting demand growth, to utilize 

environmental externality measures to help inform ~hem in making these determinations" 

[p.30C]. 

Environmental Externality Valuation Methods 

"Damage measurements should be utilized for establishing externality values. Other, 'proxy' 

measures -- such as the highest marginal cost of control method -- are unlikely to have any 

relationship to damages. Since damages are the principal aspect of environmental 

externalities, the focus should be on such impacts, even though there likely will be some 

unanswered questions" [po 23C]. 

Most values in a table presented by the Environmental Defense Fund in the Texas 

proceedings are based on the Tellus Institute and Pace studies and show differences among 

values for specific externalities to "differ by as much as 16 to 1" [p.10RC]. "DOE, in its 

testimony presented before the Massachusetts Department of Public Utilities, pointed out 

the serious flaws in these two studies" [po llRC]. 

Highest cost of control "is not accepted by many experts, because it produces externality 

values that have no relationship to damage costs" [po 11RC]. 

Scope of Monetized Environmental Externalities 

"If externality values are applied across the board to all options; and if offsets are allowed 

and are taken into account in evaluating options -- then DOE believes that externality values 

have the potential to be useful" [po 28C]. 

"Before applying any externality values it might adopt, DOE recommends that the 

Commission consider the 'net system impact' of the various alternatives under consideration 

as methods of meeting a demand growth increment. Often, these alternatives -- both 

conservation/load management as well as supply options -- will have different capacity 

factors. Those with higher capacity factors will displace more existing generation, when they 

come into service, than those with lower capacity factors. Since existing generation emits 

pollutants, there will be, for each pollutant, a net system impact (NSI) for each alternative 

under consideration. The NSI will consist of (1) the increase in pollution from the new 

alternative, minus (2) the decrease in pollution from existing generators which operate less 

often because of the new addition to the electricity system" [po 21C]. 

DOE contends that if insufficient data exist to develop a quantitative value for residual 

pollutant emissions impacts, "a qualitative value should not be used as an alternative. Use 

of a qualitative value could unjustifiably distort any integrated resource planning process" [po 

22C]. 

74 
Impacts on DSM Resource Options

DOE "strongly supports level-playing-field competition among various methods of meeting

demand growth, with consideration given to both `demand side' (conservation and load

management) and `supply side' (various types of new generating units) options" [p. 16C].

However, the reinforcement and maintenance of this policy in regard to environmental

externalities "must be addressed carefully so as not to create unjustified, implicit subsidies

or roadblocks to affected technologies" [p. 16C].

Zero Externality Values

DOE "is opposed to the argument that any economic value assigned to an environmental

externality is better than zero " [p. 14RC].

After the year 2000, there will be a constant amount of allowances for SO2 emissions.

"Because each ton of SO2 emitted will have a cost associated with it, a cost that can be

reduced by reducing emissions, SO2 externalities will be fully internalized" [p. 24C]. Costs

that have been fully internalized should therefore have a zero externality value.

Interim CO2 Externality Valuations

DOE "believes that carbon dioxide (CO2) does not, at this time, meet the criteria for a

quantitative examination of externality values. Greenhouse warming is potentially serious,

but very little is known with much certainty with regard to levels and impacts of possible

temperature increases, and proposals for dealing with emissions of greenhouse gases could

be very expensive, with large negative impacts for the U.S. economy" [p. 20C].

Appropriateness of State PUC-i posed Values

The Clean Air Act Amendments are designed to internalize the cost of SO2 through the

marketable permit trading mechanism. "With respect to SO2 and other criteria pollutants,

DOE advises against the application of cost penalties absent a clear indication that

environmental impacts of new facilities are not already adequately internalized through

existing environmental regulatory programs" [p. 1ORC].

"Additional control through State imposed `adders' (or taxes on particular fuels and

technologies) would cause a reduction in societal benefits because the added economic cost

would exceed the benefit" [p. 1ORC].

Fuel Switching

The application of externality valuations to only one sector, such as electric utilities, "could

cause distortions in market price signals and lead to inefficient use of resources. Some

75

EE-RM-93-801 COMMENT OR12

Impacts on DSM Resource Options 

DOE "strongly supports level-playing-field competition among various methods of meeting 

demand growth, with consideration given to both 'demand side' (conservation and load 

management) and 'supply side' (various types of new generating units) options" [po 16C]. 

However, the reinforcement and maintenance of this policy in regard to environmental 

externalities "must be addressed carefully so as not to create unjustified, implicit subsidies 

or roadblocks to affected technologies" [po l6C]. 

Zero Externality Values 

DOE "is opposed to the argument that any economic value assigned to an e.rIvironmental 

externality is better than zero" [po l4RC]. 

After the year 2000, there will be a constant amount of allowances for S02 emissions. 

"Because each ton of S02 emitted will have a cost associated with it, a cost that can be 

reduced by reducing emissions, S02 externalities will be fully internalized" [po 24C]. Costs 

that have been fully internalized should therefore have a zero externality value. 

Interim CO2 Externality Valuations 

DOE "believes that carbon dioxide (C02) does not, at this time, meet the criteria for a 

quantitative examination of externality values. Greenhouse warming is potentially serious, 

but very little is known with much certainty with regard to levels and impacts of possible 

temperature increases, and proposals for dealing with emissions of greenhouse gases could 

be very expensive, with large negative impacts for the U.S. economy" [po 20C]. 

Appropriateness of State PUC-imposed Values 

The Clean Air Act Amendments are designed to internalize the cost of S02 through the 

marketable permit trading mechanism. "With respect to S02 and other criteria pollutants, 

DOE advises against the application of cost penalties absent a clear indication that 

environmental impacts of new facilities are not already adequately internalized through 

existing environmental regulatory programs" [po 10RC]. 

"Additional control through State imposed 'adders' (or taxes on particular fuels and 

technologies) would cause a reduction in societal benefits because the added economic cost 

would exceed the benefit" [po lORC]. 

Fuel Switching 

The application of externality valuations to only one sector, such as electric utilities, "could 

cause distortions in market price signals and lead to inefficient use of resources. Some 

75 
energy users might shift to energy services not subject to regulation" [p. 28C]. Electric

vehicles would become less attractive while the use of 'fuels other than electricity would

become marginally more attractive.

SUPPORTING DOCUMENTATION

The following are the references, as cited, in the comments and reply comments concerning

environmental externalities.

ECO Northwest. Generic Coal Study. 1987.

Mendelsohn and Orcutt. An Empirical Analysis of Air Pollution Dose-Response Curves. 1979.

National Acid Precipitation Assessment Program. Integrated Assessment. January 1992.

Schmalensee, Richard L. "Testimony of Richard L. Schmalensee," Massachusetts Department

of Public Utilities, December 13, 1991.

76

EE-RM-93-801 COMMENT OR12

energy users might shift to energy services not subject to regulation" [po 28C]. Electric 

vehicles would become less attractive while the use of -fuels other than electricity would 

become marginally more attractive. 

SUPPORTING DOCUMENTATION 

The following are the references, as cited, in the comments and reply comments concerning 

environmental externalities. 

ECO Northwest. Generic Coal Study. 1987. 

Mendelsohn and Orcutt. An EmpiricalAnalysis of Air Pollution Dose-Response Curves. 1979; 

National Acid Precipitation Assessment Program. Integrated Assessment. January 1992. 

Schmalensee, RichardL. "Testimony of Richard L. Schmalensee," Massachusetts Department 

of Public Utilities, December 13, 1991. 

76 
EE-RM-93-801 COMMENT OR12