Testimony of Robert LaCount, Jr.

Air Quality Manager

PG&E National Energy Group

Before the

Senate Environment and Public Works Committee

November 15, 2001

 

Mr. Chairman and Members of the Committee, I am pleased and honored to appear before you this morning to represent my company, PG&E National Energy Group (NEG), and our coalition, the Clean Energy Group (CEG).

 

The Clean Energy Group members are Consolidated Edison, Inc., KeySpan, Northeast Utilities, Exelon, PSEG Power, Sempra Energy, Connectiv, and my company, PG&E National Energy Group.  We share a commitment to providing clean energy and promoting environmental policies that are sustainable from both environmental and economic perspectives.  We believe the best way to accomplish this goal is by working cooperatively with government, industry, consumers, labor, and the environmental community.

 

First, I want to thank you and the Members of the Committee for your leadership in tackling a complex but important set of issues.  We are fully aware of the very pressing issues facing the country and the Congress at this moment. We want to thank you for taking the time to engage in discussions that can lead to a meaningful consensus on a question of national importance – how best to foster energy security, reliability, and economic growth, while protecting the environment and improving air quality.   We believe that the time to begin discussions on these critical issues is now, because our industry is facing a series of regulations that could be more efficiently and economically addressed in an integrated and comprehensive manner.  By developing an integrated program to improve air quality and begin to address climate change, CEG believes that not only the environment will benefit, but industry and consumers will, as well.  This is because the power sector will be able to plan investments in a way that maximizes efficiencies, minimizes costs, and provides greater benefits for the environment, in which we all live.

 

Our industry is in the process of a fundamental change: not only regulatory changes impacting the environment, but changes impacting the very manner in which the electricity marketplace functions.  CEG supports and embraces the transformation of the electric power industry into a competitive marketplace – one that is not confined by the boundaries of a service territory or a state line.  We also recognize that the generation of electricity has a significant impact on the environment (both air quality and climate changeglobal warming) – again, one which is not confined by the boundaries of a service territory or a state line.  We agree with those who believe this impact must be reduced if the nation is to achieve its air quality and environmental protection goals.  We also share a common concern that the economic benefits of a competitive energy marketplace, and the public health benefits of improved air quality, will not be achieved unless the relationships among national energy policy, air quality and climate change are rationalized.

 

While CEG has supported several of EPA’s past regulatory initiatives, such as the NOx SIP Call, to reduce emissions traditionally associated with the industry, – nitrogen oxide (or NOx) and sulfur dioxide (or SO2) – we also share concerns that compliance delays and litigation during a period of such unprecedented change and challenging economic times has contributed to, and continues to contribute to, significant business uncertainty. that is becoming more difficult to manage, thereby, delaying needed infrastructure investments. We also recognize that uncoordinated, regulatory emission reduction programs greatly increase compliance costs and reduce operational flexibility.     

 

 

The Clean Energy Group believes there is a common sense policy solution -- an integrated air quality strategy -- to control and reduce emissions of nitrogen oxide (or NOx), sulfur dioxide (or SO2), as well as, mercury, and carbon dioxide (or CO2).  We believe that a coordinated approach will deliver significant and timely emissions reductions and provide members of our industry regulatory certainty about the amount of and timetable for these reductions, which can be factored into investment decisions and emission control strategies.

 

Mr. Chairman, we commend you and Senator Lieberman for developing and introducing legislation that addresses air quality and climate change in an integrated manner.   Although CEG is in general agreement with the scope of the emissions addressed in S. 556, and the integrated manner in which reduction targets are set, we are not in agreement with the levels of emissions reductions, the timelines for achieving these reductions, and the limits placed on flexibility in meeting the specified targets.  Also, we believe that the “birthday” provision is unnecessary and that an integrated air quality program must address some of the current deficiencies in the New Source Review program.  CEG has spent considerable time in analyzing how to balance these key provisions so that both environmental and economic results may be optimized.  In that regard, we look forward to working with you in the coming months on development of an effective integrated air quality approach.

 

Toward this end, CEG has developed what it believes is an effective proposal to improve air quality, begin to address climate change and modify the NSR program, and to do so in a way that results in reasonable cost and resource impacts versus a piecemeal approach.  The basis of our approach is that it sets defined targets for emissions reductions on a national basis and uses a market-based approach to achieveing these reductions. We believe It is our belief that only a national program implemented under authority of legislation enacted by Congress will provide the scope and compliance certainty necessary to facilitate a fair competitive market, achieve necessary environmental objectives, and provide our industry with the regulatory certainty essential for sound business planning and rational investment decision-making.

The emission reduction targets and timelines set out in our proposal are shown in this chart.  Essentially, the timelines and targets were established to maximize the co-benefits associated with implementing emission reduction technologies, to provide the industry adequate time to make investment decisions, and to allow time for the commercialization of new technologies.  The dates for the first level of reductions coincide with the dates by which the existing NOx SIP program will have run the course of its first compliance period, the second phase of the Acid Rain program will have been implemented, the current mercury MACT regulations are to be implemented, and the PM 2.5 rules will have been promulgated.  We believe it is important to (1) build off of existing, proven programs, (2) allow time for those entities that have already invested in capital improvements to comply with these programs begin to recover those costs, and (3) to rationalize future emissions reduction programs by coordinating timetables and implementation approaches. 

We in the power sector are trying to plan for promulgated federal regulations (including Phase II Acid Rain and the NOx SIP Call), those current regulatory initiatives authorized under the existing Clean Air Act (including Mercury, PM 2.5 and Regional Haze regulations),  that we know will occur anyway over the next eight to ten years (Phase II Acid Rain, Mercury MACT, PM 2.5, etc.), as well as those initiatives we predict will occur over the next ten to fifteen years (carbon regulations and additional SO2 and NOx requirements) (carbon regulations, additional SO2 and NOx reductions, others Rob?).  By coordinating emissions reduction targets, encouraging early reductions, and providing a phased approach to achieving ultimate reduction targets, the Clean Energy Group believes that its proposal will exceed the environmental benefits of individual programs and do so at a lower cost.

 

The emission reduction targets and timelines set out in our proposal are shown in the attached chart.  Essentially, the schedule was established to maximize the co-benefits associated with implementing emission reduction technologies, to provide the industry adequate time to make investment decisions, and to allow time for the commercialization of new technologies.  The first level of reductions, starting in 2008, builds off of the existing NOx SIP Call and Acid Rain Program, coincides with the compliance schedule for EPA’s mercury regulations, and complements the expected timelines associated with PM 2.5 and regional haze rules.  We believe it is important to (1) build off of existing, proven programs, (2) allow time for current compliance schedules to be fully implemented, and (3) rationalize future emissions reduction programs by coordinating timetables and implementation approaches.

 

With regard to carbon dioxide, CEG believes that comprehensive legislation must include all four emissions in order to achieve the necessary business certainty for our industry.  To this end, CEG advocates a unique approach, one that we believe will lead to reasonable cost and resource impacts, while encouraging renewable development and energy efficiency investments, and ensuring maintaininged fuel diversity.  Our program is based on three underlying principles: (1) timelines for reductions must be reasonable; (2) flexibility is required; and (3) verification of reductions is essential.  In short, the program established by the CEG proposal provides for early reduction credits, creates a processboard to for developing verification standards for verifying reductions,is built builds upon EPA’s successful Acid Rain Trading Program on a strong allowance trading program, encourages investments in renewable development and energy efficiency programs, allows for both on- and off-system reductions, and can be easily adapted to any future multi-sectoral or international program.  CEG does not believe it is necessary to wait for an economy-wide greenhouse gas reduction program to be in place for the power sector to take advantage of reductions that can be achieved both within and outside of the power sector now.  Instead, we believe it is important for this industry to play a leadership role to the advantage of this industry toin spearheading a greenhouse gas reduction program because of our significant contribution to U.S. greenhouse gas emissions, and because of the strategic advantages gained by providing time for a gradual transition to a less carbon-intensive electric generating fleet.

 

With regard to NSR, the Clean Energy Group proposal does not advocate eliminating the NSR program.  As a matter of principle, CEG supports the goals and objectives of NSR.  However, CEG believes that the existing NSR program must be changed to ensure that it complements the integrated program by facilitating expedient emissions reductions, promoting clean energy sources, and encouraging efficiency improvements without imposing unnecessary costs and delays.

 

I stated before that we believe that our proposal will impose reasonable cost and resource impacts on the power sector and the economy, as a whole.  CEG is currently finalizing an analysis modeling of our proposal using one of the models that EPA employs to assess impacts of various air and climate programs on the industry and the economy.  The analysis compares the economic and emissions impacts of our proposal with a business as usual scenario.  We believe this analysis differs from the EPA and EIA analyses presented at the previous hearing, in two main ways.  First, the CEG analysis employs a business as usual scenario that accounts for both current regulations as well as those authorized under the Clean Air Act for future implementation.  And, secondly, the CEG analysis includes significant flexibility for complying with carbon requirements including the use of offsets generated outside of the power sector.  This provides dramatic cost-savings compared to the other analyses that only modeled CO2 reductions within the power sector. 

 

  In terms of impacts on national average residential energy prices, Ourour proposal would result in price increases  modeling shows that the incremental costs of our proposal as compared to a business as usual scenario, which accounts for those regulatory initiatives on the books today, is on the order of 5% by 2010 and less than 5.756% by 2015.  On average, tThis translates into an increase of about $5 per/  month in the average on a residential customer’s bill by 2015.  With regard to fuel mix, the CEG proposal would result in a shift of about 5% from coal to natural gas use, while the impact on natural gas prices would be an approximate increase of 6% over the 2005 to 2015 period.  In terms of coal production under both our business as usual and policy cases under the CEG proposal, Rocky Mountain and Midwestern coals become more economically competitive and gain market share as many coal-fired units install scrubbers to comply with new SO2 and mercury limits. So, essentially, under the CEG proposal, significant emissions reductions can be achieved in reasonable time framess and our industry can begin transitioning to to take responsibility for our less carbon-intensive operationscontribution to global warming for reasonable cost and resource infrastructure impacts, beyond what are already expected to occur.

 

The Clean Energy Group believes that taking a national, coordinated, and comprehensive approach to addressing air quality and climate change now is the most responsible course of action that Congress can take.  Again, our industry is facing serious regulatory challenges that will continue over the course of the next decade while, at the same time, additional challenges are being placed on our industry in terms of becoming more competitiveness, more reliabilityle, and more secureity.  And these challenges are not just occurring as a result of federal activities.  In fact, some of the greatest pressures are coming from states, in terms of environmental initiatives and market dynamics. 

 

For example, Massachusetts has already imposed regulations requiring emissions reductions in SO2, NOx, mercury and CO2, while Illinois passed legislation setting in place a framework by which to do so; New Hampshire and Michigan also proposed legislation to do the same. Legislation is pending in North Carolina to significantly reduce emissions of SO2 and NOx, while Connecticut has adopted regulations requiring significant reductions in SO2 and NOx. New York has draft regulations pending.  New Jersey is moving forward with programs related to mercury, while Wisconsin is currently debating rules on mercury reduction. The Texas Natural Resources Commission recently suggested that the state should implement its own multi-emissions approach, which would address CO2, while Oregon has a CO2 mitigation fund in place.  The point is that states are moving and will continue to move in the direction of requiring additional cuts in emissions from power plants.  Although environmental benefits will result from these various state actions, we believe that only a coordinated, national approach will maximize environmental benefits and minimize costs.  The worst result for the industry, and the nation, would be to have in place fifty different programs, with fifty different sets of rules, and fifty different trading regimes.

 

This is particularly true for companies such as PG&E National Energy Group that have operations in multiple states (we currently operate generating assets over a dozen states and will operate assets in approximately a half-dozen more by 2005).  In fact, we operate two large coal-fired facilities in Massachusetts.  We will be meeting some of the toughest emissions standards in the country for all four emissions (SO2, NOx, mercury, and CO2) at these facilities.  and will do so in a manner that minimizes the cost impacts to the consumers of New England. However, we believe that if a national program were in place, we would have been able to do so even more efficiently and cost-effectively.

 

As we have stated, in order to achieve this sort of efficiency, programs must pay attention to the timing of emissions reductions required as well as the sequencing of these reductions.  We have heard discussions about this in past hearings and debates.  There is truly a continuum of legislative options with regard to air quality and climate change policies.  CEG understands this and has crafted what it believes is a program that carefully weighs and balances economic and environmental impacts.  Drilling down too quickly or too far on any one environmental concern, while not addressing another, is not sustainable and inserts extreme uncertainty into our planning and investment processes – that is where we believe we are headed now.  At the same time, drilling down too far and too quickly inserts significant uncertainty into the reliability and security of the system. However, there is a happy medium along that continuum where we can achieve both significant air quality and climate change benefits, provide industry with the certainty it requires, and do so at minimal cost and resource impacts.  That is why we believe that it is imperative that Congress enact legislation that sets a balanced framework for reducing emissions of SO2, NOx, mercury and CO2.

 

Again, I am honored by the opportunity to make this statement and I would like to thank the Committee for moving forward in a thoughtful manner on such an important issue.  An integrated and coordinated approach will inject certainty and rationality into business planning and investment decisions and maximize environmental benefits.  I look forward to responding to your questions. 

 

Thank you.


CEG Pollutant Caps and Schedule

 

Pollutant

National Tonnage Cap

Reduction Target

Schedule

NOx

2.11 million tons

Roughly a 50% reduction from current commitments (including implementation of the NOx SIP Call in the eastern U.S.), resulting in an average emission rate of roughly 0.15 lbs/mmBtu.

2008

SO2

4.5 million tons

 

 

3.6 million tons

50% reduction beyond Phase II Acid Rain requirements, resulting in an average emission rate of between 0.3 and 0.4 lbs/mmBtu.

60% reduction beyond Phase II Acid Rain requirements, resulting in an average emission rate of between 0.2 and 0.3 lbs/mmBtu.

2008

 

 

2012

mercury

Roughly 26 tons

 

Roughly 5-16 tons

65% reduction (from mercury present in as-delivered coal)

 

79% to 93% reduction (from mercury present in as-delivered coal)

2008

 

2012

CO2

Stabilization at 2000 emission levels (plus specified flexibility mechanisms)

Stabilization at 1990 emission levels (plus specified flexibility mechanisms)

Stabilization at 1990 emission levels (plus specified flexibility mechanisms/internationally agreed upon flexibility measures)

2008

 

 

2012

 

 

2015