II. EPA MISCALCULATES COSTS AND INFLATES BENEFITS

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1 To: Joint Committees on Energy & Utilities; Workforce Development, Public Works & Military Affairs From: Eric Bott, Director of Environmental and Energy Policy Wisconsin Manufacturers and Commerce Re: The Environmental Protection Agency s Proposed Clean Power Plan under Section 111d of the Clean Air Act Date: January 28, 2015 I. INTRODUCTION Good morning chairmen and members of the committees. Thank you for taking the initiative to host today s informational hearing on a topic critical to Wisconsin employers. The Environmental Protection Agency s (EPA) proposed rule to set state-specific rate-based goals for carbon dioxide emissions from the power sector will have substantial impacts on Wisconsin s energy markets, infrastructure, and economy for decades to come. Thank you also for providing Wisconsin Manufactures and Commerce (WMC) with the opportunity to testify. My name is Eric Bott and I serve as WMC s Director of Environmental and Energy Policy. WMC is Wisconsin s State Chamber of Commerce and Manufacturing Association, representing nearly 4,000 member companies statewide in every sector of Wisconsin s economy. Roughly one-quarter of private sector employees in Wisconsin are employed by WMC members. WMC is dedicated to ensuring that Wisconsin is the most competitive state in the nation to do business. Affordable energy is the lifeblood of any economy, but that is especially true for Wisconsin, which often leads the country in manufacturing jobs per capita. Wisconsin s manufacturing sector represented only 0.15 percent of all electricity customers in Wisconsin in 2012, but accounted for about 33 percent of total electricity consumed. The average industrial electric bill in 2011 was over $31,000 per month. For some large manufacturers, energy is one of the top three costs of doing business and can be well over $1 million dollars per month. It is difficult to imagine a competitive business climate in Wisconsin without the availability of affordable energy and when you consider that more than 60 percent of the electricity in Wisconsin is generated from coal, it is easy to see why this proposed rule threatens Wisconsin s access to affordable electricity. From a broader economic perspective, EPA s plan to essentially reengineer our nation s electric utility system will have little global consequence, yet it will diminish our global competiveness. For example, given the recent phenomenon of on-shoring manufacturing from countries with rising labor and energy costs, it is vital that the U.S. utilizes an all-of-the-above energy strategy. Energy supply diversity keeps energy costs reasonable and ensures steady and reliable energy for factories and homes. 1

2 For U.S. businesses and global competitors looking for a new home, energy prices represent a major input cost that will ultimately determine viability. With recent technological advances and unprecedented domestic resource availability, the U.S. is at a competitive advantage when it comes to energy prices and reliability. However, regulations such as this EPA proposal threaten to remove this competitive advantage from the equation by restricting the available energy sources. As energy prices become more volatile and reliability diminishes, U.S. firms will be less competitive, and those firms looking for a new home in the U.S. will look elsewhere. Moreover, EPA s regulations on power plants are only the first step of EPA s broader greenhouse gas regulatory agenda. The agency has committed to a suite of follow-on rules that will hit our members a second time first, as electricity customers, and then, as industries next in line for subsequent rules. For example, EPA proposed new rules restricting emissions from municipal landfills, and the agency s most recent budget request to Congress notes it will soon begin considering new GHG regulations on refineries, pulp and paper, iron and steel production, livestock operations, and cement manufacturing. Perhaps more significantly, the EPA recently proposed substantial new regulations on the emissions of methane during oil and natural gas production. EPA s proposal calls for a reduction of 45% from 2012 emissions levels by This proposal strikes us as perplexing. The industry is doing a fine job policing itself. From 2005 to 2012, methane emissions from natural gas systems declined by 15% while production soared some 33%. This shouldn t be surprising. Methane is a valuable commodity to the natural gas industry giving them strong incentives to control leakage. Additionally, that leakage represents a de minimis contribution to global methane levels. Even American cows emit more methane than our natural gas sector. While it s too soon to determine what impacts EPA s latest proposal will have on America s natural gas sector, it s worthy of consideration by policy makers. With the right hand EPA is ordering America s energy sector to convert from being largely dependent on coal to being largely dependent on natural gas. With the left, EPA is marshaling the first battles in a war on natural gas production. The potential economic consequences of EPA s 111d proposal are astonishing with natural gas priced below $4 per thousand cubic feet. What happens if EPA s other actions negatively impact the price or availability of natural gas? II. EPA MISCALCULATES COSTS AND INFLATES BENEFITS EPA has imposed numerous costly new regulations on the electric power sector in recent years. In addition to this proposal, these mandates that predominately target power plants include new National Ambient Air Quality Standards (NAAQS) for ozone and particulate matter; the Cross State Air Pollution Rule (CSAPR) to address interstate transport of air pollution; Mercury and Air Toxics Standards (MATS) under CAA Section 112; and regional haze regulations intended to improve visibility in public parks. Most recently, on November 26, 2014, EPA proposed to lower the existing NAAQS for ozone from 75 parts per billion (ppb) to between 65 and 70 ppb and is taking comments on a standard as low as 60 ppb. While it is difficult to fully appreciate the cumulative impact of this proposal with the layers of these other new and proposed regulations, studies are emerging that attempt to put this regulatory 2

3 assault in economic terms. A November 13, 2014, study by the Heritage Foundation, for example, finds that EPA s energy regulations would cost hundreds of thousands of jobs and cause a significant decline in personal income while having a minimal impact on global warming. The authors conclude that: If implemented, these regulations would reduce aggregate gross domestic product (GDP) by more than $2.5 trillion between now and Employment would track nearly 300,000 jobs below the no-carbon-regulation baseline in an average year, with some years seeing an employment deficit of more than 1 million jobs. A study by Heritage released last March finds that Wisconsin would be hardest hit in the nation in terms of lost manufacturing jobs per capita as a result of EPA s proposed regulations on the power sector. Although this earlier study doesn t look at EPA s 111d plan specifically, it does help to illuminate the intrinsic link between affordable energy and a viable manufacturing economy like Wisconsin s. An October 2014 study from NERA Economic Consulting projects significant negative economic impacts resulting from this proposal to regulate CO2 emissions from existing fossilfuel power plants. This study estimates that the costs to comply with EPA s proposed plan could total $366 billion, or more, in today s dollars. The analysis also finds that 43 states will have double-digit electricity price increases. Wisconsin is one of the hardest hit with a reduction target of 34 percent and an average electricity price hike from 2020 to 2029 of 16 percent. A study by Energy Ventures Analysis late last year puts a dollar figure on this hike, estimating that the average Wisconsin household would see an annual utility bill increase of $485 by Perhaps the best economic impact analysis of EPA s proposal to date comes from the Public Service Commission of Wisconsin (PSCW). In their joint comments submitted to EPA by PSCW and the Department of Natural Resources (DNR) on November 30, 2014, the State estimates compliance costs between $3.4 and $13.4 billion. Our analysis of the State s compliance estimates indicate that costs are likely to fall closer to the higher end of that range. Additionally, modeling performed by PSCW projects that rates could increase by as much as 29% in Wisconsin before taking into account the additional transmission infrastructure that would be made necessary by the rule. Finally, a joint study published just yesterday by The Beacon Hill Institute at Suffolk University and the John K. MacIver Institute for Public Policy finds that EPA s regulation will result in substantial economic harm to Wisconsin. Looking at 2030, the year this regulation is set to be fully phased in, Beacon/MacIver find: Wisconsin s industrial sector will be hammered with average additional electricity rates of $100,094/yr Commercial sector employers will pay an additional $1,530/yr Average residential customers will pay an additional $225/yr State disposable will be nearly $2 billion lower Approximately 21,000 jobs will be lost Compliance costs will equal $920 million in 2030 alone 3

4 Despite these significant costs, EPA s proposal would have little, if any, effect on global temperature or climate. EPA s proposal calls for a 30 percent reduction in GHGs from America s power sector by 2030, a sector responsible for roughly 4 percent of global manmade GHGs today. Based on EPA s own metrics, a 30 percent reduction in CO2 emissions will equate to approximately 555 million metric tons in 2030 or just 1.3 percent of projected emissions in that year. While determining how consequential or inconsequential those reductions will be, consider that the entirety of America s reductions in 2030 will be offset by 13.5 days of projected emissions from China. Also consider that every ton of CO2 reduced by America under EPA s proposal will be met with over 16 tons of increased emissions from the rest of the world. EPA s plan is a state-by-state solution to a global problem. It can t and won t work. This unfortunate fact is made abundantly clear by applying the methodology EPA developed and utilized to set its 2012 emissions standard for light duty vehicles to its 111d proposal. Based on EPA s own methodology: Atmospheric CO2 concentrations would be reduced by 1.52 parts per million (ppm) or less than 0.5 percent in The United Nations Intergovernmental Panel on Climate Change (IPCC) projects concentrations to range between 450 and 600 ppm in Global average temperature would be reduced by less than 2/100th of a degree (0.016 F) in The rate of sea level rise would be reduced by 1/100th of an inch (roughly the thickness of three sheets of paper). This represents a reduction in the IPCC s projected rise of between 0.05 and 0.1 percent. It s worth noting that all of the aforementioned cost and impact estimates are preliminary. EPA s rule is likely to change and these estimates will change in concert, however, we can confidently make the following three statements at this time: 1. EPA s proposal will increase, not decrease utility rates and those rate impacts are likely to be substantial. 2. The rate impacts associated with EPA s rule will disproportionately harm manufacturing economies like Wisconsin s. 3. EPA s proposal will not have a significant impact on global temperature or climate. III. EPA S PROPOSAL IS UNLAWFUL 1. Clean Air Act section 111 does not provide for system-wide regulations on a statewide basis. 4

5 Clean Air Act Section 111(d) gives EPA discretion to set standards of performance for existing sources reflecting the best system of emission reduction, or BSER. But, 111(d) requires EPA to regulate any existing source, which is a single source and not an entire system of sources. A rational interpretation of 111(d) would prohibit EPA from setting BSER on a state-wide basis being proposed as EPA s four building blocks. Further, EPA s proposed interpretation of system would allow it to indirectly regulate entities that it cannot directly regulate under Section 111(d). While traditional inside-the-fence measures such as heat-rate improvements are included in the proposal, outside-the-fence measures include giving dispatch priority to natural gas combined cycle (NGCC) EGUs to replace coal generation, new and preserved renewable energy (RE) and nuclear capacity, and energy efficiency (EE). The Clean Air Act provides no authority for EPA to regulate, or to force the states to impose, requirements under these programs. EPA has never taken such a broad interpretation of section 111. Further, re-dispatching, new construction, and programs that reduce demand are not a technology and, therefore, cannot be used as justification for the best system of emission reduction. 2. EPA cannot adopt standards of performance for existing sources unless it has regulations in place for new sources under section 111(b). Another legal hurdle EPA cannot clear relates to its new power plant proposal. Clean Air Act section 111(d) provides that EPA cannot adopt standards of performance for existing sources unless EPA has regulations in place for new sources under section 111(b). Last September, EPA proposed a standard of performance under section 111(b) for new power plants that EPA intends to finalize in June If new plant rule is not in place or otherwise found invalid, section 111(d) precludes EPA from implementing the proposed existing plant rule. EPA s section 111(b) proposal claims that the best system of emission reduction for new coalfired power plants is partial carbon capture and storage technology. However, CCS has never been installed on any large-scale power plant anywhere in the world. But the Clean Air Act requires EPA to pick a technology that is adequately demonstrated, available at a reasonable cost, and not funded by the U.S. Department of Energy. EPA will have trouble passing any of these tests, and will not pass all three. 3. EPA cannot adopt this proposal as the target sources are already subject to Clean Air Act Section 112. Another legal impasse for the proposal is Clean Air Act section 111(d) itself, which provides: (1) The Administrator shall prescribe regulations which shall establish a procedure similar to that provided by Section 7410 of this title under which each State shall submit to the Administrator a plan which (A) establishes standards of performance for any existing source for any air pollutant (i) for which air quality criteria have not been issued or which is not included on a list published under section 7408(a) or emitted from a source category which is regulated under 7412 but (ii) to which a standard of performance would apply. 5

6 When Congress amended the Clean Air Act in 1990, it passed a second version of section 111(d), with both being signed into law. Generally, when facing this situation, a court will attempt to give effect to each version, especially because the two provisions are not mutually exclusive. Reading the provisions together, however, means that EPA would not be able to adopt this proposal as the target sources are already subject to Section 112. With these and other legal considerations in mind, WMC commends Governor Scott Walker and Attorney General Brad Schimel for announcing their intention to prepare and file a lawsuit challenging EPA. Considering the strong potential for economic harm should EPA be successful as well as the dubious legal footing on which EPA finds itself, we think its wholly appropriate for the State to take whatever actions it can to defend the best interests of Wisconsin. IV. KEY POLICY CONSIDERATIONS In addition to concerns regarding macro-level cost impacts or legal questions, WMC has identified numerous concrete problems with EPA s proposal as it is currently drafted. Some of the highlights include: 1. Inequity. Foremost in our mind is maintaining Wisconsin s competitiveness. EPA s proposal does a great disservice to Wisconsin in this regard. Under the plan states like Wisconsin that have already enacted renewable portfolio standards (RPS) and energy efficiency programs are being asked to do much more while states that have done very little on this front are being asked to do comparably little. The inequity by which rate based goals have been applied to the states will result in grossly unequal cost impacts, making Wisconsin manufactures less competitive than then those in many other states. 2. Electrical Reliability. Without some type of safety valve, EPA s proposal is likely to adversely impact electrical reliability. For example, coal units designated for retirement may be needed for electric system reliability purposes. States should not be penalized for running such plants or forced to risk reliability by shutting them down. In addition, requiring NGCC units to operate at 70 percent capacity essentially transforms those units into base load resources at the same time renewable requirements increase load-following demands. Having coal units cover this intermediate load need, with its longer start-up time, will be costly and may decrease reliability. 3. Stranded Costs. Wisconsin utilities will soon have over $3 billion invested in air quality control systems at existing coal plants. It is our understanding that EPA s Integrated Planning Model (IPM) output suggests that certain plants with these recent investments will be forced to be retired or be drastically curtailed. For instance, EPA s IPM output suggests in its 2025 policy case that one unit of the Pleasant Prairie Power Plant would retire. This single retirement would result in approximately $200 to $225 million in stranded costs for Wisconsin ratepayers that neither they nor utilities should have to cover, particularly considering that these were federally mandated costs at the onset. 6

7 Baseline. Use of 2012 as a single year baseline will severely punish Wisconsin because it fails to recognize significant early action prior to This baseline would not recognize emission-reducing actions prior to 2012 that include retirements or fuel conversions, efficiency improvements, renewables and nuclear upgrades. PSCW estimates that Wisconsin s RPS and Focus on Energy programs alone resulted in a 20 percent reduction in GHG emissions between 2005 and Moreover, natural gas prices were extremely low in 2012, resulting in atypically lower coal plant use in Wisconsin and nationwide. This substantially skews the metrics by which EPA has developed it state reduction targets Interim Target. Under the current rule, substantial emission reductions must occur by 2020 to meet Wisconsin s interim goal. Wisconsin utilities and ratepayers have already made investments in generation and transmission to improve reliability and reduce emissions. The steep emission reductions required by the 2020 interim goal limits the time available to plan, permit, and construct infrastructure and upgrades, in addition to forcing inefficient retirements. Given that the rule will not be finalized until June 2015 with state plans due June 2016 at the earliest, accomplishing a significant amount of the required emission reductions prior to 2020 may have system reliability consequences. 6. Building Block 1 (Heat Rate Improvement). Wisconsin utilities cannot meet the proposed six percent improvement in the heat rate of coal units. Most of our utilities already implement HRI programs to capture efficiency gains, leaving little room for additional improvement. In addition, other EPA emission reduction mandates in existing programs and mandates set forth in this proposal actually negatively impact net heat rate. 7. Building Block 2 (Increased NGCC Dispatch). EPA s 70 percent assumption for increased dispatch by 2020 may be unattainable and otherwise disruptive to the energy markets. As noted above, converting NGCC to baseload could also adversely affect electrical system reliability. 8. Building Block 3 (Nuclear). By assigning states with existing nuclear capacity more stringent goals, EPA s proposed at-risk nuclear provision penalizes Wisconsin. 9. Building Block 3b (Increased Generation of Renewable Resources). EPA s use of state Renewable Portfolio Standards (RPS) to determine regional renewable energy goals is fundamentally flawed. These standards are end products of discussions within each state about the need for increased renewable generation and decreased emissions from each individual state s power sector. RPS is a policy-based mechanism for increasing renewable generation but does not necessarily represent actual market dynamics for renewable generation within states. EPA s allowance of out-of-state renewable generation to meet in-state goals should be supported by Wisconsin as a least-cost market-based compliance mechanism. Wisconsin s RPS allows out-of-state renewable generation for compliance, and any state plan with least cost as a compliance goal should allow out-of-state and out-of-country renewable generation. Further, EPA should allow the use of all renewable hydropower for compliance instead of 7

8 only new hydropower. EPA s rule remains ambiguous on these points. How EPA resolves this ambiguity for Wisconsin may have significant cost and regulatory implications. 10. Building Block 4 (Increased End-Use Energy Efficiency). EPA s energy efficiency assumptions fail to recognize early action by states and individual companies and presents challenges for compliance demonstration. Wisconsin, having taken early action on energy efficiency and already having captured the low hanging fruit, may face higher costs or may not be able to reach and sustain the level assumed by EPA. 11. Multi-State/Regional Approach. A regional approach has a potential to reduce the cost of compliance. But EPA s proposal to replace individual rate-base goals with a single goal that would be equal to the weighted average of the state goals would create winners and losers, making it politically impractical and unrealistic. V. CONCLUSIONS The issues raised by WMC in this testimony are not unique to our organization or even to Wisconsin. Last week, the Institute for 21 st Century Energy released a comprehensive analysis of comments filed by the various states with the EPA regarding their proposed regulation of GHGs. According to the report, a majority of states raised significant concerns with EPA including unachievable or rushed regulatory timelines (34 states), questions regarding the legal basis of the rule (32 states), threats to reliability (32 states) and negative economic consequences (28 states). Moreover, 40 states questioned the achievability of at least one of the building blocks upon which the rule is based. With such broad consensus from such a diverse group of states, it s hard to argue that this rule is anything but deeply, if not fatally flawed. In no uncertain terms, WMC opposes EPA s proposal. It is unlawful and will be detrimental to the economy of the State of Wisconsin, particularly to our manufacturing industries. American and Wisconsin employers will be made less able to compete with their international counterparts but worse yet; they will be subjected to this economic hardship without a correspondingly significant benefit to global climate. Finally, we d be remiss if we didn t recognize and thank both the DNR and the PSCW for their transparency and unprecedented collaboration with each other and with stakeholders across Wisconsin. Last year these agencies engaged in countless hours of discussions with manufacturers, utilities, environmentalist groups, and other impacted parties to fully appreciate the potential impacts of EPA s proposal. We feel that these efforts paid dividends, allowing the state to file inclusive and hopefully impactful comments with EPA. These agencies should be commended for their efforts. Again, on behalf of our member companies, thank you for the opportunity to testify before you today, for your consideration of these comments, and for your attention to an issue of paramount importance to Wisconsin employers. 8