Testimony of William F. Tyndall

Vice President, Environmental Services and Federal Affairs

For Cinergy Services Inc.

Before the Committee on Environment and Public Works

United States Senate

June 12, 2002

 

Introduction

 

Good morning.  My name is William Tyndall and I am employed by Cinergy Services, Inc., as the Vice President of Environmental Services and Federal Affairs.  In this position I manage a department that provides Cinergy Corp. and its operating subsidiaries with, among other things, information and analysis regarding environmental issues and the risks they pose.  I am also in charge of the company’s Congressional and other federal relations and advocacy. 

 

Cinergy Corp. has a balanced, integrated portfolio centered on its energy merchant and regulated operations.  The company is a Midwest leader in electricity generation owning 13,000 megawatts of capacity with a profitable balance of stable existing customer portfolios, new customer origination, marketing and trading, and industrial-site cogeneration.  Cinergy’s regulated delivery operations in Ohio, Indiana, and Kentucky serve 1.5 million electric customers and about 500,000 gas customers.

 

Cinergy’s core energy system comprises approximately 13,000 megawatts at 14 base load stations and seven peaking stations.  This portfolio includes 37 coal-fired units that we operate and at least partially own.  Of importance to our discussion today, 30 of these units will be more than 30 years old in 2007. 

 

Today I am also testifying on behalf of the Edison Electric Institute (EEI).  EEI is the association of U.S. shareholder-owned electric companies, international affiliates and industry associates worldwide.  EEI’s U.S. members serve more than 90 percent of all customers served by the shareholder-owned segment of the industry, generate approximately three-quarters of all of the electricity generated by electric companies in the country, and serve about 70 percent of all ultimate customers in the nation.

 

The Need for Multi-Pollutant Legislation

 

As most of you know, Cinergy has been a long time supporter of multi-pollutant legislation for coal-fired power plants.  In fact, I like to think that we had a hand in bringing this idea to this Committee.  Jim Rogers, Cinergy’s CEO, has long thought that both the environmental community and industry can do better than the crazy patchwork of rulemakings that currently loom on the horizon for coal-fired power plants. 

 

We count nearly a score of new requirements that may impact fossil power plants, all with separate and often conflicting timetables, implementation rules, and purposes.  The net result is a planning nightmare that makes it virtually impossible for Cinergy to have any stable notion of what requirements will be in place for our plants at any point in the future.  In this chaos, we simply cannot accurately assess which plants should be retrofit with controls, which plants should be switched to natural gas, which plants should be retired, and when any of this should take place.  

 

Nor does the present system advantage those seeking further emissions reductions from these power plants.  This piecemeal approach necessarily involves many sequential scientific and technical decisions by EPA and the States that may not necessarily be resolved in favor of the environmental community, and regardless are typically late in being made and then litigated by all sides, causing further delay.             

 

Because of this dysfunction from all directions, more than three years ago Mr. Rogers and I met with the then-Chairman Chafee to seek his assistance in crafting legislation to combine the morass of air pollution initiatives aimed at power plants into a single set of statutory emissions reduction targets.  At that meeting, he directed his staff to move forward to develop a proposal.  Later, Senator Smith stepped into the breach and made the issue one of his top priorities.  We are gratified that when the present Chairman took over, he too viewed passage of multi-pollutant legislation as a top priority for the Committee. 

 

At this time, the idea has garnered tremendous support from a diverse group of stakeholders including the Edison Electric Institute, the United Mineworkers of America, International Brotherhood of Electrical Workers, the National Governors Association, the Environmental Council of States, Candidate Al Gore and President Bush. 

 

The idea also attracted the support of many environmental groups including NRDC, the Clean Air Task Force, and the National Environmental Trust.  Let me quote their reasons in their testimony two years ago before this Committee:

 

             The Act is designed to address air pollution from the power sector… on a pollutant-by-pollutant basis.  The result is that there are numerous EPA regulatory initiatives all underway at present affecting different pieces of the power plant pollution problem, on different time scales, and with different geographic targets and often different criteria.  Each of these regulatory proceedings are subject to delay and court review…The time has come to improve on the Act’s current regulatory scheme for power plants…Surely the devil will be in the details but the stage has been set for a policy discussion that could drive us to a better, cleaner outcome.” [1]

 

I think we all can agree that the “devil will be in the details.” 

 

S. 556

 

            While it may cause a great deal of pain on both sides to admit, I think the end points of the emissions programs of the President’s Clear Skies Initiative and S. 556 are not that far apart for sulfur dioxide (SO2), nitrogen oxide (NOx) and mercury.  See Exhibit A, attached.  However, S. 556 does go further, at a much, much faster clip, and, significantly, does not provide for any averaging or trading for mercury. 

 

The proposal also includes an “outdated power plants” provision requiring the retrofitting of best available controls on all units over 30 years old regardless of the environmental need.  This provision if it is left in will make the caps irrelevant since, according to EEI, 80 percent of coal-fired units will be 30 years old in 2007.  By 2012, the percentage grows to 92 percent.  At that point, the cap program will be a pointless paper shuffle since the overwhelming majority of units will be under individual, non-tradable, emissions limits.   The Bill also creates a mandatory “on system” carbon cap designed to return the industry to CO2 emissions levels of 17 years earlier. 

 

Absent from the bill is any attempt to parse these new requirements with the existing Clean Air Act.  Rather, all of the new requirements would be placed on top of the existing Clean Air Act exacerbating the complexity of an Act that already can give the Tax Code a run for the title of “Most Byzantine and Confusing and Therefore Most Likely to Be Implemented Through Litigation.”

 

So while the Clear Skies Initiative and S. 556 may be in hailing distance in terms of the caps, the lack of trading, the forced retrofits, the truncated timelines, all make S. 556 a much more draconian measure.  Because of this, S. 556 threatens the nation’s supply of reliable power and the financial integrity of an essential industry, a potential outcome that is not needed to achieve the nation’s clean air goals.

 

S. 556’s Macro Economic Impacts

 

This Committee has already developed an extensive record on the impact of  S. 556 on electricity prices, natural gas prices, coal consumption and other key variables. 

 

As you know, last November, Assistant Administrator Jeff Holmstead stated in his testimony before this Committee that the reduction levels similar to S. 556 would result in a 30 to 50 percent increase in electricity prices and a 20 to 30 percent decline in coal generation.[2]  As the Committee knows, the low ends of these EPA-assumed ranges are based on ambitious technology penetration and demand reduction scenarios. 

 

At the same hearing, Mary J. Hutzler, the Acting Administrator of the Energy Information Administration, stated that as a result of S.556, ”the average delivered price of electricity in 2020 is projected to be 33 percent higher” and “natural gas prices are also higher by 20 percent.” 3 An earlier EIA report pegged the loss of coal generation at 38 to 42 percent while natural gas generation increased by 60 percent.

 

S. 556 would also create huge short-term imbalances in the supply and demand for natural gas.  According to EIA’s July 2001 report, the increase in natural gas use by electricity generators under S. 556 will in turn require near record levels, of production after 2005 and consumption will reach nearly four times the volume used in 2000.  To meet this demand, suppliers will need to tap into new reserves.  For instance, EIA suggests that North Slope drilling may provide at least some of the supply needed.  Inevitably natural gas producers will clamor for additional access to Artic and coastal drilling sites to meet the voracious new appetite for natural gas that S. 556 will unleash. 

 

And by the way, none of these economic analyses actually capture the full costs of S. 556.  Neither EPA nor EIA modeled the “Outdated Power Plants” provision, yet this section will immediately cancel out the cap and trade program supposedly contained in the bill, and dictate compliance strategy.  As I mentioned, in 2007 80 percent of the generation will be under this command and control provision; 92 percent will fall under the mandate by 2012. For Cinergy and for the industry, this is the provision that will drive costs and it has not even been modeled by EPA or by EIA.       

 

But those are the macro effects of this legislation.  Let me describe its impact on Cinergy. 

 

 

Impacts on Cinergy

 

To start, let me say a little about who Cinergy is and what we have done to address environmental issues so far. 

Between 1990 and the present, Cinergy invested approximately $800 million on air pollution control equipment for its coal-fired power plants.  In addition, we are currently in the middle of a huge capital investment program to add nine selective catalytic reduction units (“SCR’s”) to our system as well as taking other steps to meet the stringent NOx SIP Call requirements.  This summertime NOx program goes into effect in 2004.  When all is said and done, Cinergy will invest $800 million to comply with this program.  By the way, to put our expenditures in context, Cinergy alone is installing as many megawatts of SCR’s as the entire Ozone Transport Region.

 

Cinergy has reduced its NOx emissions rate since 1990 by 45 percent and its SO2 emissions rate by almost 50 percent.  Under the NOx SIP call, we will operate under emissions caps that are based on a target emissions rate of 0.15 lbs/MMBtu.  This is much lower than the EPA New Source Performance Standard of 0.6 lbs/MMBtu and is reflective of BACT determinations for new coal units made as recently as five years ago.  For SO2, our allowance allocation under the current acid rain program works out to about 0.8 lbs/MMBtu emissions rate, as compared to the EPA New Source Performance Standard maximum of 1.2 lbs/MMBtu.  

 

But these reduction levels do not begin to meet the requirements we will face if S. 556 passes in its present form.  According to our modeling, reduction levels equivalent to S. 556 will require the installation of 14 new scrubbers and 12 new SCR’s by 2007.  Mercury controls (probably carbon injection with fabric filters but who knows) will need to be installed on every unit except perhaps for those units with a SCR and a scrubber.  Indeed, depending on the coal type burned, the mercury requirement would probably turn into a mandate to switch to natural gas since there is no existing technology that delivers 90 percent reductions for all coal types. 

 

            And this does not even count the outdated plant provision.  Under this provision, all of Cinergy’s plants over 30 years old must be retrofit at five years from passage.  Of Cinergy’s 37 coal fired units, 30 are more than 30 years old so we would face the added expense in the next 4 years of retrofitting these units with SCR’s, SO2 scrubbers, and particulate controls. 

 

            To give the Committee an idea of the magnitude of this undertaking, typical capital costs to install “best available” controls for a medium size (500 megawatts) coal-fired unit are as follows:  Scrubbers to remove SO2 will cost approximately $125 million; SCR’s to control NOx will cost approximately $60 million; and particulate controls (ESP’s and/or fabric filters) will cost approximately $30 million.  

 

As a result, we estimate that S. 556 would require Cinergy to invest $4.3 billion on new pollution control equipment.

 

However, over the next five years, Cinergy must invest approximately $300 million per year just to maintain its existing electricity and gas distribution system, and to meet new service demands.  At the same time, we also must invest approximately $100 to 200 million per year to create the capacity to serve the steady load growth we are experiencing and to meet the reserve margin requirements of our three retail jurisdictions.  For instance, we are currently in the middle of a three-year $211 million project to transform one coal-fired power plant in Indiana into a state-of-the-art, natural-gas combined-cycle power plant. 

 

In addition, to meet the requirements of the NOx SIP Call that will go into effect in 2004, Cinergy is investing approximately $800 million dollars in control equipment over five years.  We are meeting this challenge without sacrificing the reliability of our existing gas and electricity distribution assets and without sacrificing the ongoing need to maintain sufficient generation resources to meet demand. 

 

The $4.3 billion investment dictated by S. 556 are more than 5 times the sums being spent on NOx controls and represent approximately 80 percent of our existing market capitalization of approximately 6 billion.   And this sum must be raised and spent largely by 2007, giving us really only two years after our NOx expenditures are completed to meet this fiscal challenge.   

 

It is financially impossible for a company of Cinergy’s size to make investments of this size in the time frame provided.  And lest you think we are an aberration, there are some 65 other power generators around the country that are Cinergy’s size or smaller and who generate more than 50 percent of their power from coal. I have no doubt that each and every one of these entities will view S. 556 as economically infeasible as well.

 

This is not to say that Congress cannot impose stringent new emissions targets that maintain the financial integrity of one coal-centric company or the entire industry.  Time is the key.  The industry needs at least a five-year window once it is finished with the NOx SIP Call construction to begin to meet new requirements.  This means a 2010 start for those portions of the program that necessitate new capital expenditures.  The industry also needs phased reductions so that capital expenditures can be staggered over longer periods.  For instance, the phased caps included as part of the Clear Skies Initiative provides both a strong emissions reduction roadmap and a reasonable amount of time to construct the scrubbers, SCR’s and other projects that will be required – without jeopardizing the industry’s ability to maintain the grid, add generation and deliver reliable service to our customers.

 

Other Issues

 

Aside from the affordability issue, which needless to say, captures my company’s primary attention, there are many other reasons why S. 556 is unworkable.

 

Reliability Issues Due to Retrofits:   Adding scrubbers, SCR’s and other pollution control equipment requires long design and planning lead times, expanding or creating new landfills (for additional scrubber sludge) and securing all of the permits thereto, careful coordination of the labor, cranes, sheet metal and other aspects of the construction, and long down times at plants to tie equipment in.  To meet the NOx SIP Call, Cinergy had to pay huge premiums to secure the material and laborers needed to meet the tight deadlines.  S 556 involves more requirements on more plants in a shorter time frame.  Both the construction and the chaos that will result when companies cannot finish the work in time will negatively impact reliability. 

 

Re-Permitting:  The modernization provisions of S 556 essentially require every power plant that has reached its 30th birthday to be re-permitted under the provisions of the Clean Air Act’s new source review program.  Under the applicable requirements, this would mean not only that plants would need to secure a case-by-case determination of the level of reductions they would need to hit, they would also need to have their air quality impacts measured, modeled, assessed and approved by States, federal land managers and EPA, and in non-attainment areas, secure emissions reductions offsets – despite their participation in a stringent cap and trade program.  Plants could not start construction of the controls until the process has been completed and the requirements for the “modernized” unit formally assigned.  This tortuous public process normally takes years for any one source.  

 

It is impossible to predict how long it will take the crush of units that will initially be covered by the program to secure their permits but I have no doubt that the vast bulk of these permits and the work that must follow will not be completed by the deadline in the bill. 

 

Technological Innovation:  There will not be any under S 556.  A new emissions reduction target set far enough in the future can drive technological innovation.  But the stringent targets in S 556 will not drive new technologies because of the minute lead time.  Since these massive pollution control projects take years to plan and execute yet the bill imposes the reductions within five years, companies will need to start making compliance decisions immediately upon passage.  And companies will have no choice but to go with the technologies that are commercially available at the time of passage or switch to natural gas.  This is especially true for mercury controls and monitoring technology.

 

Allocation of Allowances:  Essentially, S. 556 leaves this issue up to EPA.  However, an issue of this magnitude needs to be resolved in the legislation itself.  Cinergy strongly encourages the continued reliance on the allocation approaches that Congress used for the Acid Rain program.  This system has not resulted in any windfalls but has resulted in low compliance costs.  I have provided additional comments on this topic on behalf of Cinergy at Exhibit B. 

 

Conclusion

 

I do believe that this Committee can craft multi-pollutant legislation that both meets environmental goals and provides the industry with a workable roadmap.  I urge the Committee to carefully consider the views of industry, of the Administration, and of the breathing public, and create that bill.  In my view, well-crafted multi-pollutant legislation can pass through this Committee, the Senate, the Congress, and start creating emissions reductions and cleaner air.  S. 556, while allowing for wonderful debate, does not offer that hope. 

 

ATTACHMENTS

 

Exhibit A

 

Comparison of Current Levels,

Clear Skies and S. 556

 

Annual Emissions

 

 

 

 

 

Current Levels

Clear Skies

 

S. 556

 

2010

2018

 

2007

NOx

(Million tons)

 

3.7

--

 

1.7

 

 

1.5

 

SO2

(Million tons)

 

9

 

4.5

 

 

3

 

 

2.25

 

Hg

(Tons)

 

47.6

 

26

 

 

15

 

 

5

 

 

 

Current levels of emissions includes NOx SIP Call and Title IV SO2 reductions.

 

 

 

Key Points About Allowance Allocations

 

 

Using the Current system of Allowance Allocations

·       Allocating emission allowances on the basis of heat input, as provided under the current system for SO2 allowances, would  provide allowances to those generators that are also making significant reductions under a multi-emission approach (or even under current regulation).

·       When comparing impacts on two  states, one in the Midwest and one in the Northeast with less coal-fired generation, allocation of allowances under the current system naturally would mean more allowances to the Midwest state.  

·       The current system will make for an easier transition to a new cap and will provide greater incentives for credit for early action proposals.  Re-allocating allowances will increase uncertainty and will delay any early action by facilities that might otherwise be inclined to participate. 

 

 

Switching to an Output Based Approach

 

·       Allocating on the basis of output would provide allowances to facilities such as nuclear plants that don’t participate in a cap and trade program and are not investing in expensive emission control equipment.  In addition, this system arguably gives allowances to those that are already more competitively advantaged under a strict emission reduction program than those having to make the reductions. Such an allocation approach thus would further penalize plants making reductions, and in fact would require them to make even further emission reductions than under an input based system.

·       The relative gains to a northeast state relative to a Midwest state are illustrated in the following graphs. The graphs show potential allocations to the two states under the input-based and output-based approaches. The graphs illustrate the costs to meet a cap and the allocations under the two formulas. Results are presented in per capita values to standardize for the large differences in the size of the two states.  Results are based on numbers for sulfur dioxide reductions as indicated by S. 556, but are readjusted to eliminate a carbon cap which would result in plant shutdowns and a skew of the entire allowance system. 

·       Under the output-based approach, the Northeast state would gain relative to the Midwest state.  This gain occurs despite the fact that the Northeast state would have substantially lower emission reduction requirements than the Midwest state. 


(S.556 without CO2, using illustrative permit prices):

Annual Emissions Allocations Under Input and Output based formulas (tons)

Midwest State

Source: Calculations based on EIA data.

 

 

Annual Emissions Allocations Under Input and Output based formulas (tons)

Northeast State

Source: Calculations based on EIA data.

 

 

 

·       These illustrative results indicate that  while residents of the Northeast state would bear a relatively small burden in terms of the costs of emission reductions called for under the cap, they would reap a windfall in terms of a favorable allowance allocation. In contrast, residents of the Midwest state both would bear substantially greater per capita costs for controls and also receive fewer allowances. Thus, a switch to an output-based approach  would further exacerbate an already significant burden borne by Midwest states that  will be required to shoulder the bulk of increased costs due to the more stringent emission reduction programs.

 

 

Why Auctions Would Make Any Multi-emission Bill Unworkable

 

·       Auctioning allowances would  substantially increase costs to generators and ultimately consumers, on top of the substantial costs required to meet the emission targets.  In contrast to the situation in all other  cap-and-trade programs in which all participants can gain either as buyers or sellers relative to a less flexible command-and-control approach – under an auction approach all participants would lose.

·       Auctioning would mean that participants would pay for all of their emissions, an approach that is inconsistent with the spirit of the national ambient air quality standards.  This basically assumes that all power plants start with zero emissions, and must purchase allowances in order to operate at any level.  On top of the purchasing of allowances, generators would also be required to spend millions to add emission control equipment to their plants

·       Auctioning of all (or even a substantial share) of allowances would be unprecedented.

·       Although some suggest that an auction is a means of reducing the cost of meeting a cap on emissions, the main impact of an auction would be to transfer revenue to the government. An auction would be equivalent to a tax on electricity --- imposed on the industrial heartland and on states that are already suffering job losses and a lagging economy. 

·       In our example of a Northeast vs. Midwest state, auctioning of allowances would substantially increase overall compliance costs for residents of  both states.

·       The net effect of the auction on residents of the two states of course would depend upon how the revenues were used, which is difficult to project.


 

Illustrative Calculations of Annual Per Capita Control Costs and Permit Costs for SO, NO­X, and Mercury Under Alternative Allocations

Midwest State

Source: Illustrative calculations based on EIA data.

Illustrative Calculations of Annual Per Capita Control Costs and Permit Costs for SO, NO­X, and Mercury Under Alternative Allocations

Northeast State

Source: Illustrative calculations based on EIA data.

 

 

 

Assumptions

The results provided in the preceding graphs are based upon the following assumptions.

The graph depicts a three-pollutant bill similar to S.556 but without CO2 reductions:

 

-        NOX emissions capped at 75 percent below Title IV levels (i.e., to 1.51 million tons) by 2007.

-        SO2 emissions capped at 75 percent below the Phase II Title IV cap (i.e., to 2.24 million tons) by 2007.

-        Mercury emissions capped at 90 percent below 1997 levels by 2007.

·       Permit prices for NOX, SO2 and mercury are illustrative.  The conclusions regarding the relative implications of allocation approaches for the two States depicted should not be sensitive to these allowance prices.  The permit prices used are the following:

-        $2,000 per ton for NOX;

-        $1,500 per ton for SO2; and

-        $150,000 per pound for mercury.

 

 



[1]Testimony of Armond Cohen before the Subcommittee on Clean Air, Wetlands, Private Property and Nuclear Safety, Committee on Environment and Public Works, May 17, 2000.  Testimony submitted on behalf of Clean Air Task Force, Clear the Air, National Environmental Trust, United States Public Interest Research Group Education Fund, Natural Resources Defense Council, Izaak Walton League of America, Ohio Environmental Council, Illinois Environmental Council, Southern Environmental Law Center, Legal Environmental Assistance Foundation (Florida), Southern Alliance for Clean Energy, Campaign for a Prosperous Georgia, Physicians for Social Responsibility – Southeast Region, Citizens for Pennsylvania’s Future, and New York Public Interest Research Group.

 

[2] See Testimony of Jeff Holmstead, Assistant Administrator, U.S. EPA, before the Committee on Environment and Public Works, United States Senate (November 1, 2001) p. 10.

3 Statement of Mary J. Hutzler, Acting Administrator, Energy Information Administration, Department of Energy, before the Committee on Environment and Public Works (Nov. 1, 2001) p.3