Background on Cinergy
As background for my testimony, let me tell you about Cinergy. We are one of the nation's leading diversified energy companies, with a total capitalization of $7.2 billion and assets of $10 billion. Cinergy's operating companies, The Cincinnati Gas & Electric Company and PSI Energy, Inc., serve more than 1.4 million electricity customers and 478,000 gas customers in Indiana, Ohio, and Kentucky. Cinergy owns or operates more than 16,500 megawatts of electrical and combined heat plant generation that is either operational or under development. Approximately 11,000 of those megawatts comprise our core system of 14 baseload stations and seven peaking stations located in the three states where we currently have retail customers. Cinergy is active in U.S. power and natural gas markets and maintains a 24-hour-a-day, seven-day-a-week trading operation. The company's international business unit, |||Cinergy Global Resources, has assets in power generation, transmission, and distribution projects in the Czech Republic, Spain, the United Kingdom, Zambia, Estonia, and the United States.
While recently Cinergy has made substantial investments in renewables, combined heat and power units, micro turbines and fuel cells, most of the electricity sold by Cinergy's U.S. operations is produced at coal-fired units. Coal is a reliable, widely available and low cost energy source, particularly in the Midwest. Coal-fired generation now accounts for over 55 percent of the nation's electricity supply over 80 percent throughout the Midwestern states located in the East Central Area Reliability region (ECAR) and Cinergy believes it will and must continue to play an important role well into the future.
I want to personally compliment both Senators Smith and Inhofe for their interest in an integrated emissions reduction strategy for the electric power sector. Senator Smith led the way earlier this year by initiating stakeholder discussions. Today's hearing also represents another important step by Senator Inhofe to review key Clean Air Act implementation issues.
We at Cinergy have been pursuing the concept of a comprehensive environmental strategy for coal-fired power plants for well over a year. We firmly believe that a comprehensive strategy will yield the greatest environmental benefits for the lowest costs to consumers. And we are not alone in our thinking. The Edison Electric Institute (EEI), whose Environmental Policy Committee I currently chair, has begun both internal and preliminary external discussions with various stakeholders. We are pleased that the Vice President recognized the benefits of this approach in his Earth Day remarks. Further, several specific companies and organizations are following this issue closely as it underscores the current policy constraints on energy system modernization and efficiency gains. Cinergy views all these interests as evidence of support for this Subcommittee's as well as the full Committee's attention to this matter and of the need for congressional action.
The Importance of An Integrated Emission Reduction Strategy for the Generation Sector
According to data provided to FERC, our industry spent over $32 billion for air pollution controls between 1976 and 1996. During this period, power plant emissions declined substantially even though electricity generation and useincreased as a result of economic growth. Despite this progress, we recognize that the public expects additional air quality improvements and that power generators will need to do their share. We also recognize that the costs of further emission reductions to our industry will be significant, but that we have an ongoing responsibility to make the investments necessary to achieve cleaner air.
The real question, I submit, is whether our nation has the right strategy for meeting environmental goals while maintaining a competitive and efficient energy sector. Today's answer to this question is not reassuring. In the current regulatory landscape, U.S. power plants face an array of existing and proposed emission controls for four key substances: sulfur dioxide ("SO2"), nitrogen oxides ("NOx"), mercury, and carbon dioxide ("CO2"). Please see Charts "A" and "B" appended at the end of this statement for further details (courtesy of the Edison Electric Institute, March 2000). Federal and state agencies, and even neighboring countries, are seeking to regulate these substances through many initiatives, each involving different sources, control levels, implementation mechanisms, and compliance dates. These initiatives are not necessarily coordinated and in many cases conflicting. The timing, impact, and cost of any combined emission controls that may be required are nearly impossible to predict with any accuracy. As a result, the electric power industry faces enormous uncertainties as it contemplates long-term investment decisions involving billions of dollars. Inevitably, the lack of coordination and consistency among the many existing and proposed initiatives will mean that energy consumers as well as our shareholders will bear far higher costs than necessary to achieve clean air.
The many unresolved emission issues affecting the power generation sector have also led to protracted conflict in the courts and the political arena. A divisive climate now exists in which region is pitted against region, environmental groups are pitted against industry, and EPA is pitted against individual states and power producers. Continuation of this divisive climate may well mean that our collective energies are focused more on litigation than on emission reductions. This serves absolutely no good public policy purpose.
Is there a better way? Cinergy does not believe that we can fix the existing system through further piecemeal action. However, we do believe that legislation holds great promise which, if properly crafted, can establish a comprehensive air quality framework for the power generation sector which meets both our energy and environmental objectives. In Cinergy's judgment, this legislation should focus on four key objectives:
-- Setting appropriate emission reduction goals that address long-term air quality needs and assure protection of human health and the environment.
-- Creating a stable and predictable climate for capital investment in emissions controls and in new and upgraded generation facilities to meet current and future requirements for electric power.
-- Implementing new reductions in a flexible, cost-effective manner which preserves the benefits of efficient and reliable power production and ensures the greatest environmental return possible on our compliance investment.
-- Providing electric utilities with the proper incentives to encourage the smooth transition to cleaner, more efficient generating units.
I recognize that developing legislation which meets these goals will require hard work by Congress and many different stakeholders. However, Chairman Smith has already begun this process by announcing a new legislative initiative for the power plant sector and, with his and this subcommittee's leadership, I am very optimistic we can be successful.
The Current Regulatory Landscape
Congress last amended the Clean Air Act (CAA) in 1990. Although these amendments were extensive, Congress could not have foreseen the problems created over the past decade by the Act's often conflicting requirements, particularly as electric utilities reinvent themselves to face deregulation and the new competitive reality. The 1990 Amendments do not set specific air quality goals for the generation sector or provide a coordinated approach for reducing power plant emissions over time. While EPA has attempted to fill these gaps administratively as new emission reduction challenges have emerged, its efforts have achieved only limited success. Statutory deadlines and other constraints have discouraged coordinated strategies for controlling different pollutants in the most cost-effective manner and limited the use of emissions trading and other mechanisms for reducing emission control costs. Meanwhile, without a comprehensive legislative mandate, EPA has pursued a piecemeal approach to power plant regulation rather than a multi-pollutant strategy that would maximize environmental benefits while reducing costs to producers and consumers.
The current debate over air emission controls for power plants focuses on five main issues:
-- Nitrogen oxides. Because NOx emissions can contribute to the formation of ozone, NOx control has been one element of state strategies to attain EPA's one-hour standard for ozone. Title IV of the CAA also mandates NOx controls to address acid rain concerns, and substantial NOx reductions are now being implemented by large electric generating plants in response to Phase 2 Title IV requirements.
EPA maintains that long-range transport of NOx emitted from power plants in the Eastern U.S. is contributing to ozone non-attainment in downwind states. Consequently, EPA issued a 22-state SIP call in 1998 that seeks to create a regional NOx control program. Under this program, power plants would be required by 2003 to install stringent NOx controls that, by EPA's own estimate, would impose industry-wide capital costs of $14.1 billion. Adding to the uncertainty, EPA has moved ahead to impose parallel NOx control requirements in response to petitions filed by the Northeastern states under Section 126 of the CAA. EPA's Section 126 rule, which is intended to impose federally-enforceable controls to "backstop" the SIP call, imposes a separate regime of NOx reductions.
Cinergy continues to be willing to achieve substantial additional NOx reductions beyond Title IV in an orderly manner, but we now find ourselves confronting a monumental compliance challenge under an impossibly tight time-frame with no certainty about our own or our states' legal obligations. Cinergy alone could incur control costs of over $700 million under the SIP call, which could escalate depending on how much of a premium we must pay to secure necessary trade laborers and materials. We are further troubled by the very real threat to system reliability that is anticipated as essential generating units must be shut down for extended periods to install controls at a time when there is a historically small reserve margin in the region.
Furthermore, even deeper NOx reductions are possible in the near future in response to EPA's new eight-hour ozone standard for nonattainment areas, which is currently being reviewed by the courts. Such additional requirements could result in new NOx mandates in conflict with the NOx control strategies currently being pursued by states and industries in response to EPA's SIP Call. Finally, while EPA currently is implementing NOx controls for the ozone season, this does not rule out further action to require annual controls to address visibility and acid deposition issues.
-- Sulfur dioxide. Despite considerable progress in reducing SO2 loadings under the Acid Rain provisions of Title IV of the CAA , including further reductions being made this year under Phase II , additional SO2 controls are under consideration for a variety of reasons: (1) to support attainment of the new fine particulate standard (assuming it is ultimately upheld by the courts), (2) to implement the emission reduction goals set by EPA's regional haze strategy, and (3) to address continuing concerns about acidification of lakes and streams . However, there is no consensus at this time on the stringency and timing of further SO2 controls. Moreover, if additional SO2 controls are required, it is unclear whether EPA could or would build on the proven and cost-effective emissions trading program established under the Title IV acid rain provisions.
-- Mercury. Section 112(n) of the CAA requires EPA to study the economic and environmental impacts of power plant emissions of mercury and other pollutants and to regulate these emissions if it determines that regulation is "appropriate and necessary." EPA is expected to make this determination later this year. Depending on what decision EPA makes -- and there is considerable evidence that the known health effects of mercury do not warrant regulation at this time -- EPA might attempt to impose controls on power plant sources under the Title III air toxics program. Under this program EPA could impose expensive unit-by-unit control requirements as soon as 2007. There are currently no commercially proven technologies for removing mercury during coal combustion, so it is not possible at this time to plan for the capital costs or the deployment of control equipment. If we are going to face new mercury requirements, we should have the lead time to develop new mercury removal technologies, coordinate mercury reductions with emission control programs for other pollutants, and develop emissions-trading systems which achieve overall mercury reductions at the lowest possible cost. The current statutory framework would rule out these options.
-- Carbon dioxide. I have long expressed concerns with the Kyoto Protocol and am very concerned that the framework it creates is unworkable and needlessly expensive. Also, I do not believe that this legislative effort is the place to resolve disputes about the agreement. Still, the prospect of future CO2 emissions controls is a major source of uncertainty for the power generation sector. If CO2 requirements are imposed that compel massive expenditures by companies to switch coal-fired power plants to natural gas or to purchase expensive allowances, the sizable investments we will make to install pollution control equipment over the next 10 years could be wasted.
For these reasons, Cinergy could support a CO2 component in this bill, especially if it helped encourage the further commercial development of carbon-friendly technologies such as solar and wind power, micro turbines, fuel cells that are the key to making real progress on this issue. I believe that with your leadership and a little creativity, the stakeholders here can create a program fostering technological innovations and reducing CO2 emissions, while leaving for another day the question of Kyoto implementation.
-- New Source Review. The New Source Review (NSR) and Prevention of Significant Deterioration (PSD) permitting programs were intended to "backstop" federal and state emission reduction efforts by minimizing large emissions increases from new sources or "modified" existing sources. From an industry point of view, these programs have the unintended consequence of stifling modernization and innovation as companies try to navigate the Byzantine rules that have grown up around the program. Comprehensive legislation will allow Congress to reexamine the role of NSR/PSD in achieving CAA air quality goals for power plants. Simply put, if Congress were to put in place a system of multi-pollutant emission reduction targets for power plants, the need for an NSR/PSD backstop for covered units would be dramatically reduced. I therefore urge you to include a new, simplified new source review program in any bill.
Why The Absence of An Integrated Air Quality Framework Is Harming Industry and Consumers
The fragmented regulatory framework which now applies to electric power plant emissions is blocking progress toward our long-term energy and environmental goals in several different ways:
-- Power producers must make costly control decisions for some pollutants without knowing what requirements will apply to other pollutants. Without understanding the full range of emission reductions that will be needed at their plants, generating companies may commit to controls that are effective for some pollutants but not others, resulting in unanticipated and perhaps avoidable costs when later requirements take effect. Alternatively, they may decide to invest in continued operation of plants that might be retired or repowered if the full extent of environmental control costs were known in advance.
-- Because the compliance dates for different control requirements are highly uncertain, electric generators cannot develop comprehensive long-term capital investment strategies. The lack of clarity regarding what emission reductions will be required and when they will be implemented has made long-term capital planning difficult if not impossible a serious problem in an industry which is capital-intensive and needs long lead-times for plant construction and modification.
-- The poor alignment of different emission reduction initiatives discourages cost-effective multi-pollutant approaches. Some control technologies are likely to be beneficial in controlling multiple pollutants, but these co-benefits will not be realized unless the compliance dates and control levels for these pollutants are coordinated.
-- The potential for multiple emission reduction requirements for the same pollutant adds uncertainty to capital investment decisions and will unnecessarily increase compliance costs. For several pollutants, different levels of control and compliance schedules are being adopted on the state and federal level and even under different EPA programs. For example, requirements for NOx reductions are in place or under consideration by EPA under CAA Title IV, the 22-state SIP call and §126 rulemaking, the regional haze rule, the NSR enforcement initiative, and implementation strategies for the new 8-hour ozone and PM2.5 standards not to mention state programs like the MOU for the Ozone Transport Region (OTR) and treaty negotiations between the U.S. and Canada. Electric power producers faced with these multiple requirements will have no assurance that control strategies they adopt for NOx today will be viable two years from now, let alone the 10 or so necessary to recoup the investment. The same uncertainties exist for SO2 and mercury, both of which could be subject to multiple control regimes at the state and federal level.
-- There is no consistency in the use of trading programs across pollutants, adding complexity to the implementation process and increasing compliance costs. Congress established an allowance trading program for Title IV SO2 reductions in the 1990 CAA Amendments but did not follow a similar approach for other pollutants. Congress did not give EPA specific authority to implement a national NOx trading program in 1990; thus, EPA has adopted a "model" trading program under the NOx SIP call. The adoption of this program has been left to the states, encouraging a patchwork of trading regimes that will preclude companies from initially being able to rely on a liquid multi-state trading market since various state trading rules won't be sufficiently known in advance of the compliance deadline to provide for planning certainty. The technology-based provisions of Title III appear to rule out allowance trading for mercury (assuming EPA decides to regulate this pollutant) even though the nature of mercury emissions and the range of sources may be ideal for a trading program to moderate the enormous costs of mercury controls. And since no framework now exists for CO2 emission reductions, the availability of trading and other market-based mechanisms while generally viewed as essential for cost-effective implementation remains highly uncertain.
-- Because multiple initiatives are being pursued at the federal and state level without any overall coordination, no effort has been made to set emission reduction priorities which assure that available resources are used as cost-effectively as possible. The numerous ongoing or proposed programs to control NOx, SO2, and mercury at the national and state levels are largely intended to achieve unrelated objectives and have been developed in isolation from each other. Accordingly, neither the control levels nor the compliance schedules for these programs reflect an assessment of their relative importance in addressing environmental problems and their potential benefits in relation to the costs incurred. Thus, there is no assurance that the current piecemeal approach to electric power plant regulation will address the most important air quality concerns or provide the largest possible return on the industry's sizable investment in pollution controls.
-- Conflicts exist between the goals of different air quality initiatives for electric power plants and between these initiatives and other important energy policy objectives. For example, EPA's expansive interpretation of NSR/PSD requirements emphasizes the installation of maximum achievable control technology, whether or not needed for air quality protection, while other initiatives for the same pollutants, like the NOx SIP call and regional haze rule, are driven solely by air quality concerns. Similarly, the lengthy delays and enormous control costs associated with NSR/PSD permitting are discouraging investments in improved power plant efficiency which can lower energy costs, introduce promising new technologies, and ultimately enhance environmental performance.
Benefits of an Integrated Strategy
Given the need for a coordinated multi-pollutant framework for power plant emissions, a comprehensive legislative approach targeted at the generation sector is the path most likely to achieve the goals of industry, the public, and policymakers. Such legislation would have the following benefits:
-- Air Quality Benefits provides emission reductions needed to achieve existing or anticipated air quality goals to protect public health and the environment as opposed to requiring controls based on technological feasibility.
-- Comprehensive addresses all the major air quality challenges affecting power plants, including NOx, SO2, mercury, CO2, and NSR.
-- Planning Certainty creates a stable environment for capital investment by providing long-term certainty (10-15 years) about the industry's emission reduction obligations.
-- Cost-effective uses trading and other market-based mechanisms on a comprehensive basis to ensure maximum emission reductions for minimum cost.
- Flexibility provides electric power generators with the ability to make prudent investments in plant efficiency while assuring that air quality needs are met.
-- Eliminate Regional Conflicts with a clear emissions control road map to remove ambiguities in current law, interstate disputes and costly litigation can be curbed.
-- Adequate Lead Time establishes reasonable timetables for implementation and aligns these timetables across pollutants so that long-term investments in control technology can be made prudently and economically.
-- Innovation encourages modernization and technological innovation in the generation industry, reducing the cost of electricity and enhancing environmental performance.
-- Reliability enables pollution controls to be implemented in a phased manner which does not jeopardize system reliability.
-- Energy Diversity avoids imposing prohibitive costs on any one type of generation, thus maintaining a diverse mix of fuel sources, including coal, natural gas, oil, and non-fossil energy.
-- Legally Authorized provides a clear, well-defined legal framework for power plant regulation, reducing uncertainty and minimizing litigation.
Conclusion
Mr. Chairman, let me reiterate our strong support for your continued examination of Clean Air Act issues, and specifically for holding today's hearing on efforts to develop a comprehensive legislative framework for controlling electric power plant air emissions. We believe that, if properly crafted, such legislation would provide substantial benefits to both industry and the environment. We recognize that development of such legislation will require hard work and considerable dialogue among stakeholders, and we will work with this Subcommittee and the full Environment and Public Works Committee to move this process forward. Thank you for this opportunity to present our views.