NCE has made environmental excellence one of its priorities. It has been responsible for a number of innovative environmental programs, such as its Windsource program. Windsource is the largest customer driven renewable energy program innovative program that in the country. Later, I will discuss another is especially pertinent to your efforts.
I appreciate the opportunity to testify today regarding some of our experiences with the Clean Air Act. As in other parts of the country, the West has often grappled with the Clean Air Act's rigidity and the EPA's inflexibility. In the last five years, we have found that one of our greatest challenges is complying with the requirements imposed on us by EPA under the Clean Air Act.
Much of the electricity in the West is generated by coal-fired power plants. For example, 74% of the electricity generated by NCE comes from coal-fired facilities. The West also produces a growing percentage of the coal burned in power plants throughout the country. The popularity of Western coal arises from its low sulfur content, something we in the West have known about for a long time. Typically, even our uncontrolled plants emit sulfur dioxide at a lower rate than two-thirds of the country's coal-fired plants.
The air quality concerns in the West are also different from the East. Most of the country's National Parks, Wilderness Areas and other "Class I" areas are located in the West, so the region is naturally concerned about the impact of emissions from mobile and stationary sources on visibility in these areas. For our company, that translates into concerns about emissions of sulfur dioxide, in spite of the fact that these emissions are already relatively low.
The West's urban centers have made great progress addressing air quality. For example, although it is still characterized as a "non-attainment" area, Denver has not violated an ambient air quality standard for five years. As the Committee may know, the Denver metropolitan area is among the fastest growing in the country. Our company struggles daily to provide adequate power supplies to meet this expansive growth. Air quality issues have a significant impact on this effort.
In the West, as elsewhere, EPA administers the Clean Air Act in an irrational, costly way that often does not benefit the environment. Let me give you some examples:
As I mentioned, growth in Colorado is substantial and requires that we obtain significant new generating capacity to avoid energy shortages in the Denver metropolitan area. The Colorado Public Utilities Commission requires our subsidiary, Public Service Company of Colorado, to acquire these new resources through competitive bidding and encourages the company to enter into contracts with independent power producers rather than build new plants itself. Last fall, EPA ruled that a new, independent power plant owned by a third party was a modification of a nearby, existing plant. EPA based this ruling only on the fact that the independent power plant would be connected to the Public Service Company electric system. The effect of EPA's interpretation is to require expensive emission controls on new, independent "peaking" power plants that operate only a few hours a year - often making them uneconomical to operate. Because it may stand in the way of our efforts to provide adequate power to the people of Colorado, we have challenged EPA's interpretation in the 10th Circuit Court of Appeals.
-- Earlier this year, we were attempting to obtain a Prevention of Significant Deterioration permit for a new gas-fired generating unit at our Fort St. Vrain plant. Rather than install EPA's preferred nitrogen oxide control equipment (selective catalytic reduction), we proposed to make much greater nitrogen oxide emission reductions - at much lower cost - at one of our existing coal-fired units. The state of Colorado and the environmental community were supportive of this proposal. EPA, however, rejected it as an affront to the "integrity" of the Clean Air Act.
These are just two examples of the perverse outcomes that often result from EPA's interpretation of the Clean Air Act. Our experience with the Agency stands in sharp contrast to our dealings at the state level, and I think you might find our experience useful as you grapple with these problems.
At NCE, one of our operating priorities is "Customer First." We try to be responsive to our customer needs and desires. During the initial phase of our Windsource program, we conducted surveys that indicated 62% of our customers would be willing to pay a little bit more for "cleaner" power.
As a result, we began to consider alternatives to address the customers' concerns. Our best opportunity was in Denver itself. Public Service Company operates three coal-fired power plants in the Denver metropolitan area. We became convinced that, unless we responded to the community's concerns, our next great challenge would be over the emissions from these plants. Therefore, in 1997 after much study of different alternatives, we proposed a voluntary emission reduction program to reduce sulfur dioxide emissions from those plants by 70% and nitrogen oxide emissions by 40%. We stated that we would need three things to implement our proposal:
-- Flexibility in the operation of the facilities;
-- Assurance that new state regulations would not require additional reductions from those facilities for a period of fifteen years; and
-- Recovery of the cost of the new controls.
Having worked successfully with the environmental community on our Windsource program, we first presented this proposal to them. We also took it to a wide range of other interested parties, including businesses, labor unions, coal suppliers, the local air quality planning agency and the appropriate Colorado state agencies. We worked closely with these groups to develop and pass legislation that would allow our proposal to become a reality. That legislation, Colorado Senate Bill 98-142, was passed by the General Assembly during the 1998 session. Senate Bill 142 encourages the Colorado Air Pollution Control Division to enter into flexible voluntary emission reduction agreements with stationary sources. It grants such sources a period of "regulatory assurance" during which they will not be subject to additional state regulatory requirements. For coal-fired power plants, Senate Bill 142 specifies that a 70% reduction in sulfur dioxide emissions will result in a fifteen-year period of regulatory assurance. The Act also ensures that regulated utilities (such as Public Service Company) can recover the costs of these controls from its customers.
In July of 1998, Colorado and Public Service Company entered into a voluntary emission reduction agreement to implement our proposed Denver emission reduction program. The Agreement grants Public Service Company flexibility in complying with its requirements - through annual emissions averages, flexible tonnage caps and trading of emissions between the different plants. It grants us certainty by ensuring that the plants will not be subject to new or different state requirements for a period of 15 years. And, it assures that we can recover the costs of these controls in a way that does not put the plants at a competitive disadvantage should the electric utility industry in Colorado be restructured.
Unlike traditional command and control approaches, Senate Bill 142 allowed us to define the most cost-effective way to reduce emissions from the plants. Our analysis led us to retire the two oldest and smallest units, install relatively low cost, less effective controls on the smallest of the remaining units and install controls to achieve the maximum reductions on the largest units. We are now in the process of engineering these controls and will be in compliance with the new emission limits beginning on
January 1, 2003.
The success of this plan was the result of a great deal of hard work by a broad range of interests. I do not believe that, under the current Clean Air Act, we could have reached such an environmentally beneficial result by working with EPA. This plan became a reality largely because of the leadership of the state of Colorado.
As compared to our Denver emission reduction program, EPA's regulation of air quality under the Clean Air Act appears to be broken. It frequently creates obstacles to cost-effective environmental improvements. Our recent experience at our Fort St. Vrain plant confirms that fact. As Senate Bill 142 demonstrates, there are ways to make environmental improvements without jeopardizing the financial integrity of companies. We did it in Colorado.
Again, this Committee is to be commended for exploring a new approach to regulation of air quality. I urge you to learn from our experience. I believe that the four broad concepts embraced in Colorado Senate Bill 142 should form the basis of any reforms to the Clean Air Act: flexibility, regulatory assurance, cost recovery and state control. These four concepts were at the heart of Senate Bill 142. We have already seen how effectively they can result in significant emission reductions. I believe that, in one form or another, they will work in your process as well. With them, you will be surprised by the degree of environmental progress that the utility industry can achieve.
Thank you for allowing me to be here today. We look forward to working with you and your staff on these issues in the months ahead.