THE CITY OF HAMILTON AND ITS MUNICIPAL ELECTRIC SYSTEM
The City of Hamilton owns and operates a municipal electric system for its residents, commercial businesses and industries. Hamilton's economy is supported by industrial operations including Champion International, International Paper, Hamilton Caster, Hamilton Die Cast, Krupp-Hoesch, Krupp-Bilstein, Hamilton Fixture, and General Electric, to name a few.
The City of Hamilton is pursuing economic development strategies to recycle abandoned and underutilized industrial and commercial properties by actively participating in the redevelopment of"brownfields." Placing these environmentally challenged properties back into productive re-usewill allow Hamilton to be actively involved in the revitalization of our industrial corridor and central city. Benefits of the redevelopment of brownfields sites in the City of Hamilton include the creation of family-wage jobs, increased private investment, the retention and expansion of existing businesses, and recruitment of new high technology companies. The reuse of existing properties in our center city can also help reduce sprawling growth outside the City and throughout the region, which will help slow the increase in traffic over the long-term, in turn reducing air pollution from vehicles.
However, Hamilton's quality of life, and our ability to attract jobs through brownfields redevelopment and other business recruitment efforts, depends in large part on providing cost-effective public services to residents and private sector employers. That is why Hamilton operates a municipal electric utility, and that is why we are very concerned that EPA's current Clean Air Act policies may unduly raise the costs of service to our customers, and threaten the viability and economic competitiveness of our public power system.
Hamilton's municipal electric system consists of local electricity transmission and distribution wires, and three electric generation facilities totaling 206.7 megawatts in capacity. This electric generation includes 135 megawatts at the fossil-fired Hamilton Municipal Power Plant, 70.2 megawatts at Greenup Hydroelectric Plant on the Ohio River and 1.5 megawatts at the Hamilton Small Hydro located on the Ford Hydraulic Canal. Hamilton's Municipal Electric Plant contributes significantly to the local economy, generating purchases from local businesses of at least $2.6 million, contributing $12.8 million in household earnings, supporting 371 full and part time jobs in the greater Cincinnati region, and contributing up to $160,000 for the local tax base. Boiler #9, a 50 megawatt coalfired boiler subject to EPA's NOx SIP Call, FIP and Section 126 control strategy, is the largest and most cost-effective unit in Hamilton's fossil fuel plant. The Greenup hydroelectric facility is our primary source of power, backed up by Boiler #9 when river flow conditions do not permit generation.
In addition to overall concerns about EPA's NOx strategy that we explain below, Hamilton is very concerned that EPA's NOx strategy may adversely impact the Hamilton electric system by improperly overcontrolling Boiler #9 under EPA's proposed NOx cap-and-trade program. A second concern of Hamilton is that EPA's NOx control strategy will neither recognize the role of our hydroelectric facilities in our electric system, nor the massive decrease in NOx and other air pollution emissions that our generation system has made since 1981, when we purchased the Greenup hydroelectric facility and began producing the majority of our power through clean hydroelectric generation. See Attachment 2 (demonstrating reductions of more than 7,200 tons in NOx, S02, particulate and VOC emissions during EPA baseline years of 1995-97, including 2,700 tons of NOx). EPA is currently considering Hamilton's requests, and we are hopeful that the Agency will take into account our reasonable and justifiable concerns.
Today, I wish to emphasize that Hamilton's specific concerns are symptomatic of the overall impact of the federal NOx control strategy on public power communities and other small business entities: a stringent, costly and uniform federal mandate will inevitably have negative impacts on the smallest entities and localities. In our belief, EPA has not done an adequate job of identifying and mitigating these impacts.
Hamilton's first specific concern involves the potential over-control of Hamilton's Boiler #9 under EPA's proposed method for establishing a baseline of emissions for affected units, and allocating NOx trading allowances to cover the emissions that would be allowed from that baseline. Under EPA's proposed NOx trading system, Boiler #9 will be allocated allowances based on its historic usage. However, due to exceptional circumstances during EPA's proposed baseline utilization period, Boiler #9 could receive a serious underallocation of allowances.
Specifically, the 1995-97 baseline years, upon which the EPA NOx budgets established for individual states have been calculated, were unusual years for the operation of Boiler #9. In 1995, there was a major rehabilitation of Boiler #9 during the summer ozone season, reducing operation by 30 percent. In 1996, the utilization of Boiler #9 was reduced nearly 50 percent, due to boiler control upgrades necessary for a dry desulfurization pollution control project. Likewise, in 1997, the availability of Boiler #9 was only 59% due to a rebuild of the associated generator and final tie-in of the desulfurization project. Unless these exceptional circumstances at the Hamilton plant are taken into account in EPA's allowance allocation, Boiler #9 will be starting at a serious disadvantage under an already stringent regulatory program. (See also Attachment 3, explaining Hamilton's situation under EPA NOx control strategy).
Hamilton's second specific concern is that EPA's federal NOx allowance trading program will not take into account the role of our Greenup hydroelectric facility at our electric system, or the substantial reductions in NOx and other air pollutants that Hamilton has already undertaken through this hydroelectric system, at great cost to our community. Hamilton relies on the Greenup hydroelectric facility as its primary source of electric generation. Hamilton has substantially reduced the municipal utility's emissions of NOx and other air pollutants through its large investment in the hydroelectric facilities at the Greenup Locks and Dam on the Ohio River and at Hamilton's Ford Hydraulic Canal. The amount of power generated from this "run of the river" Greenup facility (unlike at darns with impoundment reservoirs) depends on river flow conditions and Ohio River navigation requirements regulated by the Army Corps of Engineers. The facility can only generate when there is sufficient distance between the upstream and downstream pools based on flow conditions, and when the Army Corps permits flow into the lower pool. As such, generation of electricity is a secondary function of the Greenup Locks and Dam, in which we are making use of an existing facility for the environmentally-preferable production of clean energy. However, in those cases in which the run-of-the-river does not permit electric generation, the Greenup facility is backed by Hamilton's coal-fired Boiler #9.
As a result, EPA's proposed allowance allocation to Boiler #9 may not provide sufficient to the unit if utilization is increased to substitute for hydroelectric output in order to ensure that electric demand and reliability are met. This situation imperils the City of Hamilton's ability to provide cost effective service to its citizens if the hydroelectric plants, due to flow conditions and navigation requirements beyond Hamilton's control, are unable to meet the production levels accomplished during the EPA 1995-97 baseline emissions period. Extended hydroelectric plant outages are likely to occur during the ozone season when stream flows are low, which may leave the City with insufficient NOX allowances to meet its needs. (See also Attachment 3).
Hamilton's switch from sole reliance on fossil-fired electric generation to small hydroelectric generation during the early 1980s has made its 1995-1997 heat input baseline artificially low. Hamilton has actually decreased its use of fossil fuels approximately 40% from 1981 levels while still supporting an increase of 50% in electric demand over the same period. (See also Attachment 3). This is a significant accomplishment by a public power community and represents an approach that is significantly different than the course of action typically taken by investor-owned utilities during this period. Hamilton has not accomplished this without cost to the community, as our $ 170 million investment in hydropower has imposed an additional $29.534 million in operating and capital costs than had a similar sized coal-fired facility been developed during the 1980's. These voluntary pollution prevention expenditures are in addition to Hamilton's voluntary investments in advanced coal scrubbing technology, composting facilities? and other environmental initiatives that have resulted in more than $2.5 million in yearly debt service. (See Attachments 4 & 5).
Since EPA's proposed allowance allocation is based on historical heat input, and Hamilton has already cut its heat input by 50%, the municipal electric system is expected to receive only 50% of the allocations that Hamilton must have to support its required generation. (See Attachments 3 & 6). In short, EPA's proposed NOx control and trading strategy may significantly overcontrol Hamilton's Boiler #9, despite the large investments we have made in clean power hydroelectric generation.
We believe that if EPA's proposed NOx control strategy is imposed on Hamilton, it may threaten the viability of our municipal electric system. For example, even if Hamilton installed technology to meet EPA's 0.15 Ib/mmBtu limit -- which is a cost-prohibitive option -- EPA's proposed allowance allocation to Boiler #9 (87 tons per ozone season) will permit Hamilton to operate the unit for only 66 days during the ozone season without purchasing significant additional allowances. Further controls on Boiler #9 are not costeffective. An independent engineering Bern has estimated the cost-per-ton of NOx removed for Hamilton's Boiler #9 at $7,554. This is well in excess of EPA's estimated cost of $1,468/ton removal for large electric generating units.
Likewise, if Hamilton must purchase additional NOx allowances to cover its typical generation, it will be placed at a different starting point from other affected utilities, and at a significant competitive disadvantage. The City may be forced to pay extraordinary allowance or substitute electricity prices during those periods when the City cannot rely on its hydroelectric generation to cover typical demand -if those commodities are even available. Such a situation could wreak havoc on municipal budgets. Such risks can, of course, be controlled by purchasing options and through other market tools. However, small public power communities lack the resources and expertise to play the commodities markets. Our citizens want us to be public servants, not Wall Street hawks.
I would also like to note with appreciation that both Senator Inhofe and Senator Voinovich have monitored Hamilton's concerns regarding the impact of the NOx control strategy on our municipal system, and urged EPA to take our situation into account. EPA is expected to issue a final rule on a federal NOx trading system in July, which could take Hamilton's requests into account. We appreciate the Senators' attention to this matter, and the Agency's consideration of our situation.
Hamilton's concerns about the potential impacts of EPA's NOx control strategy are not unique among Ohio public power communities, and we believe that these concerns are shared by public power systems throughout the proposed EPA NOx control region, as explained further below.
EPA'S NOX CONTROL STRATEGY MAY ADVERSELY IMPACT PUBLIC POWER COMMUNITIES
From an overall perspective, Ohio's public power communities are concerned that EPA's NOx control strategy goes beyond what is necessary to protect public health and the environment from ozone pollution, and requires NOx controls that are not cost-effective for small businesses and localities.
The impact of EPA's strategy could be particularly difficult for smaller sources and entities. EPA itself has recognized the potential for disproportionate impact on small entities, in its final Regulatory Impact Analysis for the 8-hour ozone standard (at pp. 11-27, 11-28, 11-29):
Small entities, all other factors being equal, generally have less capital available for purchase of add-on pollution control technology than large entities. In addition, the control cost per unit of production for small entities will likely be higher than for large entities due to economies of scale. Thus, control measures requiring the use of add-on control technology may cause small entities affected by State rules to experience disproportionate economic impacts compared to large entities if no strategies to mitigate potential small entity impacts are available for implementation by States.... Consequently, EPA is encouraging States to exercise regulatory flexibility for small entities when developing strategies to meet the standards adopted today. While some States may need to turn to small businesses for emission reductions, small businesses will likely be among the last sources the States will choose to control. States may consider controls on small businesses only if such businesses are a significant part of an area's nonattainment problem and attainment cannot be reached through application of all available cost-effective measures to major sources.
To the extent States consider controlling small businesses, EPA believes there are many ways States can mitigate the potential adverse impacts those businesses might experience. For example, States could choose to exempt or apply less stringent requirements to small businesses.... States could also extend the effective date for control requirements for small businesses to 2010 or later.... States could also choose to apply control requirements to other businesses first, before requiring them for small businesses.
Hamilton and the Ohio Municipal Electric Association strongly agree with this EPA recognition in the ozone impact analysis, and thus calls upon EPA to take more meaningful action to ensure that this message is translated into the Agency's ozone and NOx implementation policies. Although EPA has taken the proper step of exempting the smallest utility sources (less than 25 megawatts) from NOx controls, EPA has not assessed the impacts of its NOx strategy on small entities, like Hamilton's municipal utility, that may own both small and larger utility units. Given the stringent nature of EPA's NOx control strategy, and the disproportionate impacts to small businesses and localities that may result, Hamilton supports approaches like the so-called "Governors' Alternative" NOx control strategy that was proposed by then-Governor Voinovich, which is being pursued by Ohio and other states. Although Ohio public power believes that all approaches, including the Governors' Alternative, must better assess and mitigate impacts on small entities, we believe that the Governors' Alternative can achieve substantial reductions in utility NOx emissions of 65 percent over the next five years, in a fashion that is cost-effective and feasible for affected municipal electric systems. We call on EPA to consider working cooperatively with states like Ohio to achieve needed NOx reductions through this reasonable alternative plan.
EPA'S CLEAN AIR ACT IMPLEMENTATION SHOULD BETTER RECOGNIZE AND IDENTIFY IMPACTS ON SMALL ENTITIES AND LOCALITIES
Given the potential for adverse, disproportionate impact on small entities from EPA's NOx control strategy, Hamilton and the Ohio Municipal Electric Association urge the Agency to consider more fully how to mitigate such impacts. Most importantly, EPA should commit to performing a full analysis of small entity impacts under the Small Business Regulatory Fairness Act, or "SBREFA."
Indeed, EPA has encouraged states to identify and mitigate impacts of Clean Air Act regulations on small entities. In April, 1998, EPA issued "Guidance on Mitigation of Impact to Small Business While Implementing Air Quality Standards and Regulations." This guidance calls for "implementation strategies that [ ] mitigate adverse impacts on small sources . . . wherever possible and appropriate, including the exemption of small sources from regulations, compliance flexibility, extended compliance deadlines, and compliance assistance for small entities. EPA has issued this guidance to states, but has not made sufficient efforts to ensure that states implement the guidance, and has not made adequate efforts to implement such policies itself.
EPA's effort to identify and mitigate impacts on small entities should begin with the performance of a full SBREFA analysis for the NOx SIP call. Second, EPA should ensure that any SBREFA analyses for the NOx control strategy include the proper universe of public power communities. Specifically, the definition of"small entity" under SBREFA with respect to electric utilities includes those utilities that sell less than 4 million megawatt hours of power annually. This SBREFA standard includes Hamilton, as well as all other municipal electric generators in Ohio. However, EPA's SBREFA analysis conducted under its proposed FIP and its Section 126 rules does not appear to have used this standard, and as a result has not properly identified impacts of the NOx control strategy on public power communities like Hamilton. Third, once these impacts are properly identified, the Agency should consider the use of compliance flexibility and assistance for small public power systems, to ensure that they can comply in a costeffective manner, and that they are not faced with a competitive disadvantage against larger electric systems as industry deregulation and competition looms on the horizon.
CONGRESS SHOULD PROMOTE CLEAN AIR ACT POLICIES THAT ARE COST-EFFECTIVE, WITH COMPLIANCE ASSISTANCE TARGETED TO SMALL ENTITIES AND LOCALITIES
Hamilton greatly appreciates the efforts of this Subcommittee to oversee the implementation of EPA's NOx control strategy, and encourages you to continue playing an appropriate role to ensure that air pollution regulations are effective and reasonable. In addition to oversight, Congress should consider how it can enact legislation that will promote air quality strategies that are clear, cost-effective and supportive of market-based emissions control systems. Specifically, Congress should consider:
-- Establishing a NOx cap-and-trade system for the eastern United States. Localities, industry and EPA agree that market trading of NOx emissions is the most cost-effective manner to achieve NOx reductions. EPA is attempting to implement such a system. However, any system implemented by EPA under the current regulatory climate could be confusing and counter-productive, particularly for small entities. EPA's proposed federal NOx trading system will not be applied uniformly over the eastern United States, but instead through a hodgepodge of voluntary State programs and federal mandates. The implementation of EPA's proposed system could be particularly confusing given recent federal court rulings regarding the 8-hour ozone standard and the NOx SIP Call, as well as the on-going litigation with respect to the SIP Call. In these uncertain circumstances, a NOx trading program could be ineffective, resulting in NOx credits that are too expensive and difficult to obtain for entities like Hamilton that will need them. This situation deserves congressional attention.
-- Examination of SBREFA at U.S. EPA -- EPA's performance of its obligations under the SBREFA statute has not adequately identified impacts from Clean Air Act regulations on entities like Hamilton. Congress should consider whether EPA is effectively administering its obligations under SBREFA and take appropriate oversight or legislative action to ensure that SBREFA does its job.
-- Phasing In NOx Controls for Small Sources -- As EPA has recognized, small entities and sources may need compliance flexibility and extended deadlines in order to cost-effectively comply with Clean Air Act regulations. Hamilton suggests that a regional NOx control strategy should be phased in, with the largest utility units controlled first, followed by smaller sources. Like the successful SO2 Acid Rain program, a phased approach for NOx will focus on the most significant sources of pollution first, stimulate the development of control technologies and efficient pollution trading markets, and provide small entities with adequate time to meet their compliance obligations.
-- Clean Air Partnership Fund -- EPA has proposed a new program that would provide grants and other assistance directly to local governments for innovative approaches to air quality improvement. This "Clean Air Partnership Fund" is now being considered by Congress in EPA's budget proposal. The Fund could be available to assist local initiatives to clean the air through activities including the use of advanced technologies, energy efficiency and renewable energy projects, clean vehicles, and assistance to small businesses in reducing emissions. This sort of fund for local clean air innovation is exactly the type of assistance that localities like Hamilton need to make progress, without having to face increasingly stringent command and control mandates. I am certain that Hamilton could put the Fund to use to reduce emissions of NOx and other air pollutants, and we urge Congress to give serious consideration to this proposed program.
CONCLUSION
On behalf of the City of Hamilton and the Ohio Municipal Electric Association, I once again thank the Senators for the opportunity to testify today. Hamilton supports effective Clean Air Act requirements to reduce NOx and ozone pollution, but EPA needs to be more vigilant in identifying how these regulations might impact small businesses and local governments who need compliance flexibility in order to remain viable.