T H E NEWS IN FO

those [Republican] votes? I don’t think he was working hard enough,” says one Senate staff member.

“I’ve got to agree with the criti- cism [of the White House],” says another Senate staffer. “They were not passionate about the bill. They didn’t pull out all the stops.”

Recent evidence is that the presi- dent is going to be much more ac- tive in pushing the energy bill. He has begun hosting White House t&z li tZtes for Republican senators who strayed, so far with- out evidence of converts, though gains will no doubt come.

At some point, Bush will come to a “Sophie’s choice”: his Ameri- can oilmen friends are outraged that the promising Arctic oilfields may be declared off limits, saying they will just take their marbles overseas. Bush won’t sacrifice ANWR drilling easily, but he may have to let it go to get a bill out of the Senate. And if he can’t pry Senators from his own party away from the opposition, he’ll be unable to blame the bill’s loss on the Democrats.

With voters restive about the economy and an election fast ap- proaching that not only voters but the candidates as well seem un- ready for, this one is hard to call. Brave talk of another Senate vote on cloture before the session seems like whistling in the grave- yard.

- Kimberly Dozier

and h4a y O’Driscoll

December 2991

States Push Domestic Coals

TO Fuel Switch or Not to Switch, ThereS the Scrub: Utilities Ponder Choices

I t was called a cheap stick-up and a greedy attempt to blud-

geon the ailing West Virginia high- sulfur coal industry But both sides agreed on one thing: it worked.

These harsh judgments refer to a new kind of hard-sell marketing by West Virginia natural gas com-

panies, led by Hope Gas, a subsid- iary of Consolidated Natural Gas. For four years Hope had unsuc- cessfully tried to convince the owners of the huge Harrison Sta- tion that the three-unit, 1,920 MW power plant ought to burn more natural gas. For four years the claims fell on deaf ears. West Virginia’s high-sulfur coal was cheap and plentiful, said Harrison’s owners, and, in con- trast to natural gas, coal prices could be predicted for years into the future.

c u s

Last year’s passage of the Clean Air Act Amendments heartened West Virginia gas companies: Har- rison, located near Clarksburg, W.Va., was one of the nation’s largest and dirtiest power plants. Fuel-switching to a blend of 90% low-sulfur West Virginia coal and 10% West Virginia natural gas was a cheap and easy solution to the daunting task of cleaning up Harrison, they said.

But the new Clean Air law did not make Harrison’s owners - Monongahela Power, West Penn Power and Potomac Edison, all subsidiaries of Allegheny Power Systems - any more receptive to the alleged financial and environ- mental benefits of fuel-switching. So, earlier this year, the gas com- panies turned off the charm and cranked up the heat: they asked the West Virginia Public Service Commission to mandate fuel- switching at Harrison.

T he petition infuriated the util- ities and coal miners, who ac-

cused the gas companies of trying to boost their market share at the expense of a vital state industry, Harrison’s owners, the state’s high-sulfur and low-sulfur coal miners, the West Virginia con- sumer advocate and the PSC staff all supported installing scrubbers at the power plant. Aside from the gas companies, no energy or consumer group supported fuel- switching as a compliance option.

The high-sulfur coal industry, claiming that fuel-switching would be the first step toward its extinction, spent heavily on adver- tising to convey its gloom-and-

9

THE

doom message throughout the

state. At least 8,000 West Virgin-

ians would lose their jobs if Harri- son fuel-switched, claimed

spokesmen for utilities and the

miners. The state’s deeply-de-

pressed economy could ill afford

such a shock, they said.

The fear-mongering electrified

the state: one rally held by su-ub-

ber advocates drew more than

2,000 attendees, according to local

news estimates. A pro-scrubber

group was formed, and it threat-

ened to send 5,000 coal miners to

the PSC’s compliance hearings.

Regulators feared a media circus.

Politically Explosive

By mid-September the fuel

switching issue had become so po-

litically explosive that commis-

sion staff opened negotiations

with the gas and coal interests.

The goal was to remove the fuel-

switching option from the PSC

agenda.

At the end of September a deal

was cut: Harrison’s owners

agreed to burn more natural gas

at their other power plants and

the gas companies withdrew their

intervention in the compliance

proceeding. The price? About

three billion cubic feet of new gas

sales, estimates Stan Burnett, a

spokesman for Hope Gas.

0 f course, it is possible the

West Virginia PSC could sur-

prise everyone and opt for the

fuel-switch/co-fire option pushed by the gas companies. But that

option may not be very likely, par- ticularly since the commission

will be looking at the socio-eco-

NEWS IN F 0 c u s

nomic effects of Harrison’s com- pliance strategy

The gas companies’ interven-

tion “caused an avalanche of op-

position and political pressure”

from the utilities and the coal min-

ers. Says Burnett: “It was over- whelming. N

Adds PSC Secretary Richard

Cunningham: “This is probably

the hottest case I’ve seen in my 13

years here.”

“Coal miners were really angry

that gas companies would try to

take their market when we have

lost so many markets in the last 10

years,” Steve Webber, a United

Mine Workers official in West Vir-

ginia, told The Electricity Journal.

“The gas companies really didn’t

have a case -they would not

have been able to convince the

PSC” of the merits of fuel-switch- ing. Webber said there is “a lot of

bitterness” between gas and coal interests in the state.”

The fuel-switch/ co-fire option would have required about $75

million in capital costs, approxi- mately 11% of the $725 million Al-

legheny is prepared to spend to

build three scrubbers at Harrison. These scrubbers will also generate

2.2 million tons of wet sludge per

year, which must somehow be dis-

posed of. The fuel-switch/co-fire

option avoided this disposal head-

ache, with its environmental and

financial implications.

6 6 H arrison’s scrubbers are not

cheap, and it is possible to

get West Virginia low-sulfur coal

for a low price,” Bruce Braine, a

coal and clean air expert at Fair-

fax, Va.-based ICF Resources, says

in an interview. Allegheny’s

scrubber decision “may be ques-

tionable,” he told The Electricity

Journal, but it is also possible that

stiff penalties for breaking long-

term high-sulfur contracts may

have helped tip the scales in favor of scrubbing.

Aggressive Coal Miners

In most cases where state fuels policy is at issue, gas and low-sul-

fur coal interests have fared less

well than in West Virginia. In a

way, West Virginia gas interests

simply took their cue from aggres-

sive positions taken by coal min-

ers in Ohio and Illinois, where

they lobbied legislatures for spe- cial assistance and set-asides to

mitigate economic impacts of the Clean Air Act amendments.

In Illinois, the legislature, pres- sured by coal miners, enacted a

law last July that would require Il- linois Power to install two scrub-

bers at its Baldwin Station and Commonwealth Edison to build two scrubbers at its Kincaid Sta-

tion. The bill was signed into law

in August by Gov. Jim Edgar.

10 The Electricity Journal

r T H E

The Illinois legislature had ear-

lier considered mandating the in-

stallation of three scrubbers at Baldwin. But Illinois law calls for

least-cost utility planning and,

while the bill was being debated,

Illinois Power determined that switching Baldwin to western

low-sulfur coal was probably its

least-cost compliance option. In

the near term, scrubbing came in a distant second; in the end, the

company adopted the view that uncertainty over coal transporta-

tion costs made scrubbers a more

predictable - and possibly lower

cost - compliance option over a

30- or 40- year period.

Protecting Jobs

“There is no economic reason why Baldwin, located on the Illi-

nois-Missouri border and with

good access to low-sulfur coal,

should scrub and continue bum- ing Illinois high-sulfur coal,”

Steve Mitnick, vice president and

chief economist at Science Appli-

cations International Corp.

(SAIC), told The Electricity ~o0um.d.

“Protecting the jobs of coal min- ers is a legitimate issue over

which states are concerned,” adds

Michael Schnitzer, a managing di-

rector at Putnam, Hayes & Bart- lett. “But dealing with this con-

cern by mandating scrubbers represents a tax on utility ratepay-

ers. Our compliance planning work has shown that there are an enormous number of cost-effec- tive fuel-switching options.”

Consumer advocates, regulators

and industrial end-users in Illi-

nois failed to ask their legislators

NEWS IN F 0 C U S

a crucial question, says Mitnick

“Why are you intentionally mak-

ing our state less competitive

through forced scrubbing, which

results in higher electricity rates?” The law cross-subsidizes Illinois

coal miners, he says; parties that

should have opposed it made a

“pathetic” showing.

Of course, to take that stance in

Illinois would have required

some political courage. Economi-

cally-depressed Illinois is a high-

sulfur coal state, and 75% of the

state’s coal is exported to other states. Tighter emission standards

mean at least some of those con-

In the end, they won and elec-

tracts will either be cancelled or

tric consumers lost. In mandating

subject to tough renegotiation, so

Illinois miners fought fiercely for

a bill that would protect at least

scrubbers at Baldwin and

the relatively small in-state mar-

ket.

Kincaid, IIlinois lawmakers con-

cluded, at least implicitly, that

higher electric rates were more so-

cially desirable than unemployed

coal miners. With the legislature

1 dead-set against fuel-switching, Il-

linois Power applied for a Depart-

ment of Energy Clean Coal Tech- nology grant to help defray the

cost of building a high-efficiency

scrubber at Baldwin. But the util-

ity came up empty in midSep- tember when DOE picked the

CCT Round 4 winners. So two

conventional scrubbers will be

built at Baldwin, at a cost of up to

$450 million, substantially more

than most think it would have

cost to fuel-switch at the three 560

MW units.

Economic Distortion

This kind of local economic dis-

tortion will, perhaps inevitably,

states and utilities that have

occur as states try to protect do-

mestic industries while the nation

sought federal subsidies and spe-

moves toward cleaner air, says

economist Robert Hahn of the

cial treatment from the Congress

American Enterprise Institute,

based in Washington, D.C.

and the Internal Revenue Service.

“There is an inevitable tension

between what economists see as

For example, the Environmental

the most efficient solution and the

Tax Policy Alliance, a group of

political situation faced by af-

fected groups like coal miners,”

utilities with large Phase 1 expo-

says Hahn. “That’s why the Act

was flexible [on compliance mea-

sure, is pushing for a package of

sures]. The price of this flexibility

means the result may be less than

perfectly efficient.”

B ut Hahn is less sanguine

about those heavily affected

December 1991 11

T H E NEWS IN F 0 C U S I federal tax credits and accelerated

amortization of scrubbers, which

could save its members hundreds

of millions of dollars over two or

three decades. These utilities’

gains, however, would likely be

every U.S. taxpayer’s loss when it comes time to make up the lost

federal tax revenue.

The Southern Legislative Con-

ference in July asked Congress to

appropriate funds to help cut the

Tennessee Valley Authority’s acid

rain compliance cost. The state

lawmakers are fearful that TVA

will fuel-switch to low-sulfur coal

at several large units, thereby

throwing thousands of Kentucki-

ans out of work

A nd PSI Energy, which faces

an acid rain cleanup bill of

as much as $1.6 billion over 10

But such action seems unlikely

years, has been pushing the fed-

now. Both Congress and the Edi-

eral government to shorten the

useful lives of scrubbers so they

can be depreciated faster. The Tax

Reform Act of 1986 wiped out

many financial breaks for utilities

that built scrubbers, including tax-

exempt financing rapid amortiza-

tion and federal tax credits. Short-

ening the useful life of a scrubber

through federal tax legislation could save utilities that build

scrubbers up to several hundred

million dollars per year, estimates

a PSI lobbyist. Restoring these federal tax

breaks would cut the cost of build- ing scrubbers by 10% to 30%, esti-

mates Stanley Garnett, chief finan- cial officer of Allegheny Power

Systems.

son Electric Institute are staying clear of utility pleas for special

treatment. No one on Capitol Hill

wants to reopen the divisive cost-

sharing debate, which paralyzed the House for the better part of

1990. Moreover, with the federal budget deficit still spinning out of

control, now is not a good time

for expensive financial favors to

the utility industry, say Hill staff-

ers.

EEI wants no part of these mea-

sures because its members are di-

vided on the issue, and because

they could expose the industry to

the thing EEI dreads most: car-

bon taxes. Those EEI members

They see federal intervention in

that have already cleaned up their

the market as much more far-

power plants fought cost-sharing

relentlessly in 1990, and will fight it again if they must, they say

Analysts say state assistance to

in-state coal industries introduces

inefficiency that will ultimately in- crease the nation’s cost to comply

with the Clean Air Act. But, they add, state assistance is unlikely to

be far-reaching enough to destroy the economics on which the law is

based.

reaching and capable of destroy-

ing the program’s economics, as

well as the carefully crafted com-

promises which support it.

N We are trying to reduce sulfur dioxide emissions by the most

economical means,” says Hahn. “If everyone starts throwing mon-

key wrenches into the machinery

-whether it is mandated gas co-

firing, conservation or scrubber

tax credits - there will be prob-

lems.”

Some suggest that state lawmak-

ers, instead of tilting the table as

peremptorily as lllinois did, may

want to look to the more flexible

approach taken in Indiana, which

earlier this year passed a law granting pre-construction pru-

dence decisions and guaranteed

cost-recovery on scrubbers. Indi-

ana coal miners and PSI Energy

pushed hard for that bill, which

passed the legislature nearly unanimously

I

ndiana has plenty of coal min-

ers, but the state’s lawmakers

wisely chose a less intrusive way

to help them, SAIC’s Mitnick

says. The measure is likely to in-

troduce less inefficiencies than the

Illinois forced-scrubbing law. He

estimates that the Illinois law will

result in three economically inde- fensible scrubbers being built, two

at Baldwin and one at Kincaid. The Indiana measure, on the

other hand, will probably only cause one additional scrubber to

be built, at an Indianapolis Power

& Light power plant, he says. Lawmakers and utility regula-

tors in Pennsylvania, Kentucky

and West Virginia could also fol-

12 The Electricity Iournal

T H E NEWS IN F 0 C U S i

low the lead of Ohio legislators, who in July granted a $l-per-ton state tax credit to Ohio utilities burning Ohio coal.

Ashley Brown, a commissioner with the Public Utilities Commis- sion of Ohio, concedes that Ohio’s $l-per-ton tax credit “clearly biases things to some extent to- wards the Ohio coal industry but not to the extent that the Illinois [forced scrubbing] bill does. This is a more balanced approach than that taken in Illinois.”

B ut the other shoe has not yet dropped in Ohio. The Ohio

commission, responding to pres- sure from state coal miners and legislators, has criticized sharply American Electric Power’s plan to fuel-switch at its 2,600 MW Gavin Station. In an analysis of AEP’s compliance plan, the PUCO told the utility giant in late September to go back to the drawing board and reconsider its numbers and its options, including assump- tions about the long-term price and availability of Eastern low- sulfur coal.

Though the Ohio regulators’ ef- forts are more sophisticated than the Illinois legislature’s manda- tory scrubber law, its pursuit of scrubbing Gavin may make the difference one of style rather than substance.

Mandating scrubbers, whether through indirect or overt means, is bad for another reason, say mar- ket advocates: more scrubbers mean more allowances on the market, which will push down prices. In an extreme but not im- possible case, the Phase 1 allow- ance trading market could col- lapse because it has too many sellers and not enough buyers.

Utilities have, to some extent, re- lied on allowance price estimates to calculate whether it makes sense to install a scrubber in the first place. Allowance price expec- tations have fallen by about 50% in the last 12 months, and now hover in the $200-350 range, ac- cording to studies conducted by several consulting firms. Utilities that planned to sell these allow- ances as a way to offset the huge

Duelling over clean air compliance choices.

capital cost of building a scrubber may have to rethink their options.

P hase 1 allowances can be sold in Phase 2, which starts

in 2000, but utilities selling the al- lowances then must pay for the scrubbers well before the allow- ances they generate actually pro- duce any revenue. Add the inter- est charges on several billion dollars of scrubber outlays and you may have a market with pro- found distortions.

This, of course, could be great news for utilities planning to fuel- switch to comply with Phase 1 standards. “If enough states con- strain their utilities’ options by, in effect, mandating scrubbers, the rest of the market won’t have to scrub. Allowances will saturate the market and more utilities will be able to blend coal and buy al- lowances as their compliance strategy,” says PHB’s Schnitzer. “The more allowance prices fall, the more attractive this strategy becomes.”

SAIC’s Mitnick says he is disap- pointed with the action of state legislatures on acid rain: ti A lot of economists were very optimistic about the idea of tradeable pollu- tion rights to solve the acid rain problem. A lot of environmental- ists also would like to see a suc- cess hereso that they could apply it to other forms of pollution and environmental control. But there are a lot of forces working against the success of the free market. Tradeable pollution rights may not [work] here.”

- John Egan

December 2992 13