[House Hearing, 113 Congress]
[From the U.S. Government Publishing Office]
THE PRESIDENT'S CLIMATE ACTION PLAN: WHAT IS THE IMPACT ON SMALL
BUSINESSES?
=======================================================================
HEARING
before the
SUBCOMMITTEE ON AGRICULTURE, ENERGY AND TRADE
OF THE
COMMITTEE ON SMALL BUSINESS
UNITED STATES
HOUSE OF REPRESENTATIVES
ONE HUNDRED THIRTEENTH CONGRESS
FIRST SESSION
__________
HEARING HELD
JULY 18, 2013
__________
[GRAPHIC] [TIFF OMITTED]
Small Business Committee Document Number 113-031
Available via the GPO Website: www.fdsys.gov
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HOUSE COMMITTEE ON SMALL BUSINESS
SAM GRAVES, Missouri, Chairman
STEVE CHABOT, Ohio
STEVE KING, Iowa
MIKE COFFMAN, Colorado
BLAINE LUETKEMER, Missouri
MICK MULVANEY, South Carolina
SCOTT TIPTON, Colorado
JAIME HERRERA BEUTLER, Washington
RICHARD HANNA, New York
TIM HUELSKAMP, Kansas
DAVID SCHWEIKERT, Arizona
KERRY BENTIVOLIO, Michigan
CHRIS COLLINS, New York
TOM RICE, South Carolina
NYDIA VELAZQUEZ, New York, Ranking Member
KURT SCHRADER, Oregon
YVETTE CLARKE, New York
JUDY CHU, California
JANICE HAHN, California
DONALD PAYNE, JR., New Jersey
GRACE MENG, New York
BRAD SCHNEIDER, Illinois
RON BARBER, Arizona
ANN McLANE KUSTER, New Hampshire
PATRICK MURPHY, Florida
Lori Salley, Staff Director
Paul Sass, Deputy Staff Director
Barry Pineles, Chief Counsel
Michael Day, Minority Staff Director
C O N T E N T S
OPENING STATEMENTS
Page
Hon. Scott Tipton................................................ 1
Hon. Patrick Murphy.............................................. 2
WITNESSES
Michael Kezar, General Manager, San Miguel Cooperative, Inc.,
Jourdanton, TX................................................. 4
James L. Brown, President, Bremen Castings, Inc., Bremen, IN..... 5
Bernard L. Weinstein, Maguire Energy Institute, Southern
Methodist University, Dallas, TX............................... 8
Paul Gardner, Vice President, Business Development, Agilis, Palm
Beach Gardens, FL.............................................. 10
APPENDIX
Prepared Statements:
Michael Kezar, General Manager, San Miguel Cooperative, Inc.,
Jourdanton, TX............................................. 25
James L. Brown, President, Bremen Castings, Inc., Bremen, IN. 30
Bernard L. Weinstein, Maguire Energy Institute, Southern
Methodist University, Dallas, TX........................... 37
Paul Gardner, Vice President, Business Development, Agilis,
Palm Beach Gardens, FL..................................... 48
Questions for the Record:
None.
Answers for the Record:
None.
Additional Material for the Record:
Ad-Hoc Coalition of Small Business Refiners.................. 51
THE PRESIDENT'S CLIMATE ACTION PLAN: WHAT IS THE IMPACT ON SMALL
BUSINESSES?
----------
THURSDAY, JULY 18, 2013
House of Representatives,
Committee on Small Business,
Subcommittee on Agriculture, Energy and Trade,
Washington, DC.
The Subcommittee met, pursuant to call, at 10:00 a.m., in
Room 2360, Rayburn House Office Building. Hon. Scott Tipton
[chairman of the subcommittee] presiding.
Present: Representatives Tipton, Luetkemeyer, Hanna, and
Murphy.
Chairman TIPTON. Well, good morning. I would like to thank
everyone for taking the time to be able to come into our
hearing this morning and we officially call this to order.
I would like to thank our witnesses for appearing today to
discuss the potential implications of the president's recently
announced Climate Action Plan on small businesses. I will note
that this was supposed to be a two-panel hearing. The Committee
invited officials from the Environmental Protection Agency to
testify, but they declined. This is unfortunate for several
reasons. As many members know, the purpose of this Committee is
to give small businesses a voice in government. All too often,
Congress and federal agencies fail to consider the potentially
negative consequences to small businesses of the laws we pass
or the regulations that agencies seek to impose. The Regulatory
Flexibility Act, of which this Committee has jurisdiction, is
intended to ensure that when federal agencies consider new
regulations that they analyze and quantify their potential
effects on small businesses.
In addition, the RFA requires certain government agencies,
including the EPA, to conduct small business advococy review
panels prior to the regulation's publication in the Federal
Registry. This process not only helps small businesses
understand the potential scope and costs of government
regulations, but allows them to actively inform and assist
agencies in developing less burdensome alternatives.
Unfortunately, compliance with RFA has too often been the
exception rather than the rule, and few agencies have done a
worse job in meeting their RFA obligations to small businesses
than the EPA, which declined to attend the meeting today.
In too many instances, the EPA has improperly certified
rules as not having significant impacts on small businesses. It
has produced flawed economic analysis of its rules, and failed
to provide small business review panels with sufficient
information to assist them in informing agency rulemaking.
Poorly crafted and burdensome regulations have been the result.
And let there be no mistake; the new emission limits from
electric power generating facilities outlined in the
president's Climate Action Plan will have significant and far-
reaching implications for the economy and for small businesses.
A previously proposed rule to limit greenhouse gas
emissions from electric generating facilities, which the EPA
never finalized, would have increased the cost of producing
power from coal by between 30 and 80 percent depending on the
facility. This, in turn, would directly impact small coal
mining operations and small business electricity producers. And
let us never forget those same rules and regulations impact
senior citizens on fixed incomes and working men and women;
that are trying to provide for their families. These costs are
real.
The regulations would have also raised costs to energy
consumers, particularly manufacturers. Unfortunately, in its
usual pattern, rather than taking these factors into
consideration, the EPA is moving forward with complete
disregard to small end-users. Perhaps the agency feels it is
justified in pursuing rulemaking without seeking small business
input. If so, then they should have appeared before this
Committee today and should have said so on the record. However,
if the EPA and the Obama Administration will not listen to
small businesses, this Committee will.
I look forward to hearing the testimony of today's
witnesses and will now yield to Ranking Member Murphy for his
opening statement.
Mr. MURPHY. Thank you, Chairman Tipton. And thank you for
having this important hearing today.
I want to thank you all for being with us today. It is
important that we hear from you, both ourselves and this entire
Committee, on how federal policies may affect your livelihood,
positively or negatively.
Climate change is already having a serious impact
throughout many of our nation's communities. In southern
Florida, where my district is located, we are seeing these
changes firsthand. As sea levels rise, the storms we face every
hurricane season are becoming more violent and more dramatic,
increasing the threat to public safety and jeopardizing
infrastructure, homes, and businesses more than ever before.
These changes also impact the local economies that are most
vulnerable to these sea-level conditions.
For small businesses, the effects of climate change are
significant. Extreme weather events have become more common,
causing billions of dollars in damages during the last two
years. Small firms are left not only with physical damages but
often with lower consumer demand. As a result, many shut their
doors altogether. In addition, climate change is now affecting
human health for small businesses and this is a real concern.
Heat waves continue to blanket parts of the country while
respiratory illnesses and asthma associated with pollution
remains a problem. This is a double-edge sword for small
firms--fewer customers and a less healthy workforce.
To address these challenges, the president has put forth a
Climate Action Plan which contains a wide range of proposals to
reduce emissions of carbon dioxide and other greenhouse gases,
and to help our nation adopt to expected changes in the
climate. Among its most important provisions are the directives
to reduce pollution from power plants, incentivized greater use
of renewable energy, and encourage the development of energy
efficient technologies. Taken together, these steps have the
promise to reduce U.S. greenhouse gas emissions while spurring
investment in new industrial sectors.
While these steps would reduce our country's CO2 emissions,
increase efficiency, and move the U.S. toward an ``all of the
above'' energy strategy, it is critical to address the plan's
impact on small businesses. Small firms could face higher
energy bills. As lower pollution but potentially more costly,
energy sources come on online. Some businesses are some of the
largest energy consumers, so we need to carefully consider how
the president's plan will affect them.
Another outcome of the president's plan would be to
stimulate further energy innovation. By prioritizing cleaner
energy broadly, new technologies would be developed and brought
to market. Such stimulus is often accompanied by job growth,
providing many communities with a foundation for a more
prosperous future. From a development of new generation
turbines to the construction of more efficient buildings, small
businesses are ready to lead American forward.
All these factors are important as we evaluate the best way
to address climate change as they touch on all aspects of our
economy. The panel here today will help us understand the
potential impacts, both positive and negative, the president's
plan on the small business community, ensuring that the plan
helps us reduce carbon emissions but in a way that minimizes
economic disruption is critical.
I look forward to hearing from our witnesses today and
yield the remainder of my time. Thank you, Chairman.
Chairman TIPTON. I thank the ranking member for his opening
statement. If Committee members have an opening statement
prepared, I ask that they submit it for the record.
And I would like to take a moment to be able to explain our
timing lights for you. Each of you will have five minutes to be
able to deliver your testimony. At the beginning of your
statement it will start out green. When you have one minute
remaining the light will turn yellow, and finally, at the end
of your five minutes it will turn red and if you could wrap up
at that time, we would appreciate it.
I would like to go ahead and begin the testimony from our
panel. Our first witness is Mr. Michael Kezar, general
manager of San Miguel Electric Cooperative, Inc., which is
located in Jourdanton, Texas. Mr. Kezar joined the cooperative
when the San Miguel facility was first under construction, and
has served in a number of capacities prior to his becoming
general manager.
Mr. Kezar, thank you for taking time to appear before this
Committee, and please deliver your testimony.
STATEMENTS OF MICHAEL KEZAR, GENERAL MANAGER, SAN MIGUEL
ELECTRIC COOPERATIVE, INC.; JAMES L. BROWN, PRESIDENT, BREMEN
CASTINGS; BERNARD WEINSTEIN, MAGUIRE ENERGY INSTITUTE, SOUTHERN
METHODIST UNIVERSITY; PAUL GARDNER, VICE PRESIDENT BUSINESS
DEVELOPMENT, AGILIS GROUP.
STATEMENT OF MICHAEL KEZAR
Mr. KEZAR. Good morning. My name is Mike Kezar and I serve
as general manager of San Miguel Electric Cooperative.
I appreciate the invitation to appear before the
Subcommittee this morning to discuss the potential impact that
the regulation of carbon dioxide emissions under the New Source
Performance Standards of the Clean Air Act could have on San
Miguel and its members.
San Miguel was organized for the sole purpose of owning and
operating a mine-mouth, lignite-fired generating plant and
associated mining facilities in Atascosa County, Texas,
approximately 60 miles south of San Antonio. As a not-for-
profit cooperative, San Miguel has no shareholders, and the
total cost of owning and operating the plant, including any
compliance costs associated with regulation of CO2 emissions
will be borne directly by San Miguel's consumers and members.
I want to stress at the outset that the Clean Air Act is
not the appropriate vehicle for the regulation of CO2 for
several important reasons. First, any meaningful effort to
produce emissions will require the kind of tough national
economic and public policy choices that must be made by
Congress with the transparency and participation allowed
through the legislative process.
Second, reducing greenhouse gas emissions in the U.S. alone
will have no significant impact on worldwide inventories;
however, it would likely have a notable impact on our nation's
ability to compete in the international marketplace. Any
significant effort to address greenhouse gas emissions must
only be undertaken as part of an overall initiative that
properly balances domestic and international interests. The
Clean Air Act is not structured to facilitate the balancing of
these interests and public policy concerns.
EPA's NSPS CO2 standards for new coal fire generation were
initially proposed in April 2012. That proposal is to be
withdrawn with the president requesting a new proposal no later
than September 20th of this year. The new proposal must not
include the same technical and legal flaws that were present in
the April 2012 proposal. One of those flaws was a combination
of coal-fired and natural gas-fired generating facilities into
a single regulated category and then establishing one emission
limit for the entire category. This combination into one large
source category is unprecedented for this type of rule. Coal-
fired and natural gas-fired generating units are very different
and combining them makes no practical sense, flies in the face
of decades of EPA Clean Air Act precedent, and likely violates
the Clean Air Act's requirements regarding sub-categorization
of different types of source categories.
EPA admitted that new coal-fired generation was incapable
of meeting the proposed emission limit, and the proposal
allowed potential new units the option of meeting an interim
standard coupled with carbon capture and storage (CCS) to be
applied in the future. The mandate to install in the future a
technology that is not currently commercially available
effectively ensures that no new coal-fire generation will be
built within the foreseeable future.
Section 111 of the Clean Air Act requires that cost be
taken into account when developing NSPS for both new and
existing units. CCS may be technically feasible, but its
deployment would effectively double the cost of power produced
by coal-fired, electric-generating facilities, and there is no
evidence that the technology will become commercially available
in the new future. If EPA were to make CCS applicable to San
Miguel, the doubling of costs would almost certainly force the
unit out of service; therefore, the technology does not meet
the NSPS mandate for cost consideration.
Although Section 111 requires that NSPS be economically
achievable at the unit level, the EPA could force guidelines on
states that are unrealistic and couple them with requirements
for emissions averaging or offsets with natural gas or
renewable generation. While this approach may be viable for
larger electric utilities with broader generation portfolios,
it would not be viable for San Miguel or other small electric
utilities whose generation is primarily coal-based.
Lastly, EPA must follow the requirements of the Regulatory
Flexibility Act. The act mandates that EPA take steps to
minimize the economic impact that Section 111 regulations would
have on small business entities such as San Miguel. I am
especially concerned that EPA may posit that the guidelines
themselves do not directly affect small business, but rather
that the state implementation plans would. Executive Order
13563, as well as the president's June 25, 2013 memorandum
entitled ``Power Sector Carbon Pollution Standards'' clearly
advocates that policy formulation not prejudice small business
entities. An upfront consultation process involving small
business entity representatives would be an excellent
opportunity for the administration's own objectives to be
satisfied.
That concludes my statement. I thank the Committee for the
opportunity to address these important issues and I would be
happy to answer any questions.
Chairman TIPTON. Thank you, Mr. Kezar. You left 20 seconds
on. Mr. Brown, you may or may not use those if you would like.
We would like to introduce our next witness.
Mr. James Brown is president of Bremen Castings, Inc.,
located in Bremen, Indiana. Bremen Castings is a fourth
generation, family-run business which was started by his great
grandfather in 1939. Mr. Brown, thank you for appearing today,
and we look forward to your testimony.
STATEMENT OF JAMES L. BROWN
Mr. BROWN. Good morning, Chairman Tipton, Ranking Member
Murphy, and members of the Subcommittee. Thank you for this
opportunity to testify before you on this timely subject of the
President's Climate Action Plan: What is the Impact on Small
Business?
My name is J. B. Brown, and I am president of Bremen
Castings in Bremen, Indiana, a small town of 5,500 people,
roughly 50 minutes south of South Bend, Elkhart. As a small
business that is energy intensive, I am very concerned that the
regulations proposed by President Obama on the utility sector
to force a quick reduction in carbon emissions would place on
my company and the entire U.S. foundry industry a substantial
disadvantage to our foreign competitors and will raise our
electric rates greatly.
Today, the metal casting industry remains critical to the
U.S. economy, as 90 percent of all manufactured goods
incorporate engineered castings into their makeup. Castings are
used in cars, trucks, planes, railroads, ships, air
conditioners, refrigerators, lawnmowers, oil and gas field
equipment, medical devices, water infrastructure, wind
turbines, tanks, bombs, just to name a few areas. In short,
Castings represent a vital, yet very basic aspect of our
everyday life.
I am proud to be a fourth generation Indiana metal caster
and president of the family-owned small business that has been
in continuous operation for over 75 years. Growing up I spent
many hours around the foundry and continued my experience
through high school and college. I have worked every job, every
shift throughout our 155,000 square foot facility. Both my
parents' fathers worked in this plant and today we still have
other families that are currently on their fourth generation as
well. More recently, my daughter representing a fifth
generation has been learning the business interning in the
foundry machine shop every chance she gets when she is on break
from school at Indiana University.
After weathering a number of recessions and overcoming
changes in the marketplace, our foundry continues to be a
leading metal caster producing thousands of different types of
gray and ductile iron castings. Our team of over 250 associates
today manufacture an array of castings for heavy truck,
agricultural equipment, valves, pipe fittings, pump components,
compressors, lawn and garden equipment, as well as a variety of
critical parts for the military Humvees, Oshkosh defense for
the U.S. Department of Defense. BCI has been a long-time
supplier of John Deere and Case New Holland in the agricultural
sector, as well as Eaton in the heavy truck sector. We are now
exporting castings from agricultural equipment to Brazil,
France, Mexico, and Canada.
By the way of background, the U.S. metal casting industry
and the world's second largest producer of castings after
China, metal castings are truly the foundation for all
manufacturing. The U.S. foundry industry is comprised of 2,000
operating casting facilities with over 50 of these plants
located in Indiana. More recently, a few new foundries have
been built in states with inexpensive electricity, as well as
proximity to their customers.
The American metal casting industry provides employment to
over 200,000 men and women directly, and supports thousands of
other jobs indirectly. The industry supports a payroll of more
than 8 billion and sales of more than 32 billion annually. Our
industry is dominated by small business with over 80 percent of
the U.S. metal casting employers having 100 workers or less.
Over the past two years, Bremen Castings has worked
diligently to cut some of our energy costs and become more
efficient. In fact, we have made significant investments, over
half a million dollars in a variety of energy-saving projects.
Despite being an energy-intensive industry, foundries are major
recyclers. Castings are manufactured from recycled scrap
material rather than newer virgin material and melt stock.
Annually, U.S. foundries consumed 15 to 20 million tons of
recycled scrap material giving new life to products that would
otherwise go to the landfills.
The foundry industry believes that it is imperative for the
Americans to continue to expand access to our domestic energy
supply in order to meet current needs for affordable energy and
shore up our energy security. Oil, natural gas, and clean coal
remain essential contributors to America's energy security. In
addition, we strongly support the building of the Keystone XL
pipeline and urge the U.S. Department of State to approve the
president's permit for this project to move forward.
As an energy-intensive manufacturer, I am very concerned
about the consequences of the president's plan outlined on June
25th to regulate greenhouse gas emission from new, modified,
and existing power plants on my foundry, other industries, and
in manufacturing across the United States. I believe this new
rule will cause power plants to close, drive up power costs for
households and businesses across the country, and especially
harm manufacturing-heavy states.
Additionally, these new regulations have banned all of the
above energy policy and will threaten the foundry industry's
ability to remain competitive in the international
manufacturing environment. We compete globally against
countries like China, where the industry is often state-owned,
controlled, and subsidized, including for electricity costs.
Furthermore, if the proposed rules will adversely affect
Indiana manufacturing consumers much more than most states.
Indiana is a top energy-using state, and most of its
electricity comes from coal-fired power plants. Currently, coal
generates about 40 percent of electricity in the U.S.; however,
in Indiana it is 80 percent. The proposed utility rules will
make Indiana manufacturing, including BCI, less competitive
with other states that are not coal dependent in countries that
do not have strict rules in place, ultimately costing jobs.
Energy is the life blood of the U.S. foundries and most
manufacturers, and even slight competitive advantage if the
price of energy can make an enormous difference for the
companies like mine that compete globally. Like all
manufacturers, we benefit from the decreased production costs
attributed to lower energy prices.
In conclusion, as an energy-intensive industry, comprised
primarily of small business, metal casters are troubled by the
prospect of increased electricity costs and reliability issues
that will likely result from the administration's new power
plant regulation being developed. Establishing new, stringent,
and burdensome regulations on the power sector will have a
negative effect on all U.S. manufacturers regardless of company
size, consumers, or long-term health of the U.S. economy and
the prosperity of American workers. As we are transitioning our
power-generating fleet, utilities need flexibility to ensure
that they can manage these emerging environmental regulations
while continuing to control costs. We do not need more
regulation roadblocks as the country and our industry struggle
out of this recession.
Thank you for the opportunity to appear before you today. I
look forward to your questions.
Chairman TIPTON. Thank you, Mr. Brown.
Our next witness is Dr. Bernard Weinstein. He serves as an
associate director for the Maguire Energy Institute and is an
adjunct professor of Business Economics at the Cox School of
Business at Southern Methodist University in Dallas, Texas. Dr.
Weinstein has authored and co-authored a number of books and
articles on the subject of energy security. He has also served
as a consultant to energy firms on legislative and regulatory
topics.
Dr. Weinstein, thank you for appearing, and we look forward
to your testimony.
STATEMENT OF BERNARD WEINSTEIN
Mr. WEINSTEIN. Thank you, Mr. Chairman, and members of the
Committee, for this invitation to speak for a few minutes.
I want to focus on some of the macroeconomic concerns that
I have about these proposed climate change policies and
regulations. As the previous speaker mentioned, the economy is
not in great shape. Second quarter gross domestic product is
probably going to come in at about 1 percent growth rate. The
unemployment rate is 9.6 percent. It has been virtually
unchanged over the past year. There are 12 million Americans
unemployed. If you add in discouraged workers and part-time
workers who want to work full-time, we are talking about 22
million. If we look at total payroll employment in the U.S., it
is 3 percent lower than it was before the Great Recession
began. We have a long way to go before we get back to full
employment and sustainable growth.
This recession and its aftermath has really hit small
businesses, and that matters because, as you know, small
businesses employ two-thirds of the nation's workforce, but we
are seeing declining rates of business formation in recent
years. Businesses with less than five years in business
represent 35 percent of all companies today down from 50
percent a couple of decades ago. Employment in young firms has
dropped from 20 percent to 12 percent in recent years, and as
your Committee's own research has demonstrated, the regulatory
burdens, the compliance costs facing small businesses are
considerably higher than they are for large businesses. And
that is why I think it is very important for this Committee and
indeed all Committees in the U.S. Congress to look very
carefully at the president's proposed Climate Action Plan
because those proposals will raise the cost of electricity. And
we do not know the specifics yet, but we do have some history
that suggests that these regulations that will be promulgated
by EPA will be quite costly. We have seen analyses in the past
of CSAPR, of course, that air pollution rule, which is now
before the Supreme Court, the Utility Maximum Achievable
Control Technology (MACT)--I always have trouble saying that.
But a very reputable economic research firm estimated that
those two regulations will decrease national GDP by $350
billion over 20 years, cut employment--net employment--by 2.5
million, even taking into account location of so-called green
jobs, and increase the cost of electricity to households and
small businesses by at least $1,000 a year. And in some states
that increase could be even greater.
Now, if we add in the compliance costs that will likely be
associated with these GHG regulations, that is obviously going
to push up power costs even more. I think it is fair to say
that the president's plan is mainly at coal-fired power
generation. We need to keep in mind, of course, that 40 percent
of this nation's electricity comes from coal, and we have seen
a slight decrease in the contribution of coal to the grid
mainly because of a sluggish economy and because of the aging
of plants and low natural gas prices, but we are going to need
coal for a long, long time.
When we talk about higher electricity costs, anything that
is going to affect business in general is going to affect small
businesses disproportionately. Small businesses are typically
operating on thinner margins. If they have to pay more for
power, that is really going to affect their bottom-line.
And then there are grid reliability issues. We have already
heard about that. If we were to switch off 40 percent of the
nation's power, or even if we were to phrase it out over say a
10-year period, there would be some serious, serious concerns
about having adequate reliability on the grid. Worst case
scenario we see rolling brownouts and blackouts all over the
country. Power shortages can disrupt communities, can disrupt
businesses, can affect the economy more broadly, could derail
the nascent revival of U.S. manufacturing. So there are lots of
issues there that we need to be concerned about.
Some of you may have seen this plan that has been put forth
by the National Resource Defense Council. They hope the EPA
will adopt their proposals. Basically, what NRDC is calling for
is a very, very complex approach to greenhouse gas reduction. I
do not have time to discuss it here but I would encourage you
to read my written testimony in which I present a detailed
critique.
And finally, I think there are some other issues that we
need to keep in mind when we talk about climate change and
climate change action. Number one, greenhouse gas emissions in
the United States are lower than they were 20 years ago, even
though the economy is a third larger. And as we have already
heard, any marginal reductions in GHGs from the U.S. will
likely be more than offset by increases in emerging countries.
That is why we need a global approach to greenhouse gas
reduction.
Then there is the whole issue of who should be making
energy policy. Should it be Congress or the EPA? There are
other things that we can do if we are really concerned about
climate change. We can encourage a nuclear revival in this
country. We can talk about natural gas fueled vehicles instead
of electric vehicles. We can talk about liquefied natural gas
(LNG) exports. Ironically, one way that we could help bring
down global GHG is by exporting our gas and encouraging other
countries to buy our gas instead of burning coal.
So, again, the EPA is proposing what could be some very,
very expensive regulations with disproportionate impacts on
small businesses, and I think it is very important to keep in
mind the fragile state of the U.S. economy and the fragile
state of a lot of small businesses when we move forward on
climate change issues.
Thank you very much for your attention. I will be happy to
answer any questions you may have.
Chairman TIPTON. Thank you, Dr. Weinstein.
I would now like to yield to the ranking member so that he
may introduce our next witness.
Mr. MURPHY. Thank you, Mr. Chairman.
I am pleased this morning to introduce Mr. Paul Gardner,
who is the vice president of Business Development for Agilis
Group, a company headquartered in Palm Beach Gardens, Florida.
Mr. Gardner has been working in the aerospace industry for 25
years and has particularly focused on research and development
of turbine engines for power generation and flight
applications. Mr. Gardner has a broad range of experience in
the turbine industry and has helped his company grow by
developing relationships and wind contracts to support several
key clean energy initiatives, including research and
development of high-efficiency natural gas engines, clean coal
combustion, CO2 sequestration systems, fuel burn reduction and
increased fuel efficiency for advanced air Force and Navy
aircraft systems, turbine power generation from advanced small
modular nuclear reactors, catalytic low emissions combustion
systems, advanced wind turbine gear systems, and turbine power
generation from advanced fuel cell systems.
Thank you for being here today, Mr. Gardner, and I look
forward to hearing your testimony. That was a tongue-twister.
That was impressive.
STATEMENT OF PAUL GARDNER
Mr. GARDNER. Thank you, Chairman Tipton, and Ranking Member
Murphy for allowing me the opportunity to testify before your
Subcommittee regarding President Obama's Climate Action Plan
and its impact on small business.
My name is Paul Gardner, and I am the head of business
development for Agilis Group. Agilis is a 20-year-old
professional engineering services company focused on the
technical research and engineering development of turbine
engines. Agilis is a small business with approximately 130
full-time employees, mostly degreed engineers in Palm Beach
Gardens, Florida. We also have an engineering office in Camden,
South Carolina. We currently provide advanced research and
development engineering to the turbine original equipment
manufacturers in the industrial power generation, oil and gas,
military flight, and commercial flight industries.
Our business contracts and engineering projects primarily
come from private industry. Only a very small percentage of our
work comes directly from government agencies and direct
government contracts. Agilis wins contracts from the turbine
engine companies and provides sub-supplier support to the
government contracts these companies have received. At Agilis,
we believe that the president's Climate Action Plan will have a
definite impact on our business.
I would like to explain some details of the work we have
performed to illustrate how funding of clean energy
initiatives, specifically the research and engineering
development of clean energy technologies can provide direct
support to small businesses like Agilis.
In 2002 and 2003, Agilis provided sub-supplier support to a
DOE contract to convert the waste coal dust from a coal-fired
plant in Alabama into electricity. The original plant design
collected the residual coal dust from the coal-fired boiler,
compressed and packaged it into transportable blocks, and
shipped it off to be stored as toxic waste. In support of the
DOE contract, Agilis performed the combustion research,
engineering design and development of a turbine combustion
system that burns the residual coal dust as a fuel for a small
industrial gas turbine. The turbine engine now produces enough
direct electric power from the coal dust to operate the entire
facility.
Since 2009, Agilis has provided sub-supplier support to DOE
contracts directly focused on the technical research and
engineering development of the next generation fuel efficient
turbine engines. These DoD programs include the Navy's Task
Force Energy and the Air Force's VATE (Versatile Affordable
Advanced Turbine Engine) initiatives. These programs directly
aligned with the DoD Operational Energy Strategy Implementation
Plan released in March 2012 with a key goal factor to increase
fuel efficiency and reduce reliance on foreign oil supply.
Since 2009, Agilis has received more than 5 million in
engineering contracts from the turbine engine contracts to
support these programs.
Agilis has provided over $5 million in engineering effort
in support of the DOE program to develop advanced compression
systems used in the capture and sequestration of CO2. This
effort is in direct support of the president's plan to cost
effectively meet financial and policy goals, including the
avoidance, reduction, or sequestration of anthropogenic
emissions of greenhouse gases.
Agilis has provided over $10 million of engineering support
to develop and implement advanced catalytic combustion and low
emission systems. Agilis has also supported development of
turbine engine designs for advanced helium-cooled small modular
nuclear reactors powered by stored nuclear waste material. Our
customers published research suggest that there is enough
degraded nuclear waste stored in the United States today to
fully meet our domestic energy needs once this technology has
been fully developed and implemented. If additional DOE and
customer internal funding is made available to continue this
development, Agilis and other small businesses will directly
benefit.
Many of these clean energy technologies and energy
efficiency programs are ongoing development efforts that will
provide future contracts and work for Agilis. Agilis does not
receive these projects directly from government agencies. We
receive our business contracts and engineering projects from
the turbine engine companies. However, the majority of these
programs have been driven by specific government initiatives
that are aligned with the needs and goals of private industry.
In support of these programs, Agilis has been able to grow and
hire 23 full-time engineers in 2013, of which 15 have been
recent college graduates. These clean energy initiatives create
high-paying jobs for small businesses.
Now, as we try to understand the implications of the
climate action plan and its impact, we believe there are
several related topics and issues that must be addressed by
this Committee for the Climate Action Plan to have a positive
impact. These topics include stronger encouragement for the
prime government contractors to flow work to small businesses,
keeping high-skilled, high-value engineering jobs on shore;
meaningful tax incentives for small businesses to grow;
controlling the insurance cost burdens that small businesses
bear, and consistency in funding subsidies and government
research and development initiatives. Small businesses are
often the first impacted when budgets are in doubt. Small
businesses struggle to find the financial stability to weather
through the uncertainties of funding delays, sequestrations,
and continuing resolutions.
Mr. Chairman and Ranking Member, thank you again for
allowing me the opportunity to testify today. I hope I have
helped you further understand how the Climate Action Plan could
impact small business.
Chairman TIPTON. Thank you, Mr. Gardner. And I would like
to thank all of our panel for testifying. It is my
understanding that the ranking member has another obligation
shortly and so I will yield to him to start our questioning.
Mr. MURPHY. Thank you, Mr. Chairman. I appreciate that.
Thank you all for your testimony. I appreciate your time.
Mr. Gardner, your company is an example of how a shift
toward cleaner energy can result in business opportunities and
job growth. Without federal leadership in this area of clean
energy, how successful, in your opinion, would Agilis be today?
Mr. GARDNER. Right now, about 40 percent of our business
comes as a sub-supplier for government contracts. Our customers
are in a very competitive industry. They sell gas turbines for
flight and industrial power. There will be competition. They
will spend internal research and development money, but the
initiatives that the government has put forth are giving them
goals and things that they need to achieve through new levels,
and for us that means research and development. It means the
effort required, the scientific technology and research
required to go and find how practically and cost effectively to
make the changes to those engines so that you do get cleaner
natural gas burn or you do find ways to make power in a
different way from residual heat in other areas.
Mr. MURPHY. So you mentioned about 40 percent of your work
is government-related. Are you seeing an increase from the
private and demand from the private sector?
Mr. GARDNER. In some degrees, yes; but, as a small
business, the private sector is more directly related to the
timing of how the economy does. As a small business there is a
delay, and so as the economy improves--and it is sluggish right
now--as the economy improves what we see is a delay in getting
contracts. As there is still uncertainty, these companies are
unwilling to spend a lot of their own money until they know
that they can continue to make a profit.
Mr. MURPHY. How impotent do you feel a consistent stream of
government funding is to the advancement of some of these
technologies? And part two of that is I read a study recently.
I verified to myself that China is, in fact, investing about
three times as much in renewable energy as we are. Can you
comment on both of those?
Mr. GARDNER. Well, for us the consistency is important in
hiring because as a small business the margins are small. And
we are affected greatly by the utilization of our employees. We
have to keep them busy. So as things are consistent and these
programs are funded long term and you do spend multiple years
with a wind subsidy or with some other subsidy for clean coal,
then that work can trickle down to a small business, and those
prime contractors feel more confident in giving the work or
investing their own money in that research and development.
When things are in a stop and start mode, what happens is that
work stays at the prime contractors and I never get to see it.
Mr. MURPHY. Thank you.
Mr. Brown, you commented, and I agree, the importance of
manufacturing in our economy and in your business metal
castings, the importance of that, how have you seen your
business change with the increased demand or supply of greener
energy technologies, whether it is geo thermal, wind, solar,
etcetera? Has that increased your business investing?
Mr. BROWN. Well, for some foundries that produce, for that
industry, yes, for those castings. But where we are located,
solar and wind is not really--northern Indiana--is not viable
for us. One of the things that we are seeing is from our
customers where we have an energy surcharge. And as our
electric rates go up, so does the price of our castings. So
they go to states that have manufacturers or can get castings
that do not have such a high energy surcharge, so we are
saying--we are being--I do not want to say punished, but we are
losing work because of that.
Mr. MURPHY. I would imagine in your business it is a pretty
energy-intensive production to produce these castings. Have you
done anything internally within your company to perhaps make it
more efficient with energy costs?
Mr. BROWN. Right. We spent about $500,000 last year on
energy-efficient new technologies, and also, we work with our
town. But one of the things that we are, we can only melt
between 6 p.m. and 6 a.m. And if we go above those time periods
we get fined essentially about $15,000 for the rest of the
month because of how much electricity that we do use. It is
about 40 percent of our costs, so it does hurt us.
Mr. MURPHY. Thank you.
Mr. Kezar, the president is proposing to phase out tax
provisions that benefit fossil fuels. How would this affect
your cooperative and its consumers?
Mr. KEZAR. Phasing out tax benefits for fossil fuels would
not affect us at all.
Mr. MURPHY. It would not?
Mr. KEZAR. No.
Mr. MURPHY. Okay.
And Professor, you state in your testimony that CO2
emissions are lower than they were 20 years ago. Do you feel
that this is enough, we have gone far enough? Should we stop
here? Or do you think we should continue to look at perhaps
other ways. You mentioned fossil fuels, LNG. While I support
that as a transition fuel, do you think renewables are
ultimately where we should end up?
Mr. WEINSTEIN. First, can I make a correction? I misspoke.
At least I think I misspoke when I said the nation`s
unemployment rate was 9.6 percent; it is 7.6 percent.
Chairman TIPTON. We knew what you meant.
Mr. WEINSTEIN. I want to correct that for the record.
It is a very broad question. We have made significant
progress in reducing GHG, mainly in response to market forces,
as well as regulatory mandates. We know the air is cleaner
today than it has been in a long, long time. From a global
perspective, one could argue that we have done more than our
fair share but I do not have any philosophical opposition to
doing more. I just think whenever we talk about addressing
climate change we need to look at the costs versus the
benefits. Renewables have a role to play. I do not believe we
can run our economy solely with a combination of efficiency and
conservation and renewable. We are going to need base-load
power in the future.
Now, I saw something yesterday. I think it was an article
in the New York Times or the Wall Street Journal about advances
in battery-stored technology. I do not have any problems using
some of my tax dollars to underwrite that type of research
because ultimately, renewables are only going to make sense if
we can develop that battery storage technology. But it is
probably not going to be in my lifetime, and maybe not in your
lifetime where we get to the point where we can store thousands
of megawatts during the day and use them at night.
So I am for an ``all of the above'' energy policy, but when
Mr. Obama talks about all of the above, he may have a different
vision than when I talk about all of the above.
Mr. MURPHY. Okay, good.
Well, thank you all for your testimony. I appreciate your
time. And Chairman, thank you for holding this hearing. Thank
you.
Chairman TIPTON. Thank you. I now recognize Mr. Luetkemeyer
for his questions.
Mr. LUETKEMEYER. Thank you, Mr. Chairman.
I just have a comment before we get started here with
regards to the EPA not showing up today. I am very sorry that
did not happen. I think their lack of attendance shows a lack
of respect for this Committee and the process that we, as
congressmen, and as this Congress have for oversight. I also
think it disrespects our panel who they need to hear from. If
they are going to promulgate rules and impact your lives and
your businesses, they need to hear from your side so that they
have a better understanding of what their rules have as far as
consequences. So I am very disappointed.
With that being said, that is not unusual with that group.
They do not want to listen to anything that happens in the
private sector. They have their own mindset and off they go.
Mr. Kezar, thank you for coming today. Quickly, you live in
a state that is expanding dramatically, economically, and
obviously there is going to be tremendous increased energy
needs. How do you anticipate meeting those energy needs with
this kind of restriction unable to expand with coal-fired
plant? Are you going to continue to do this or are you going to
build a natural gas plant next to the other one? What's your
plan?
Mr. KEZAR. That is a broad question, so let me deal with
maybe the first part a little differently.
As you are probably aware, the state of Texas is dealing
right now with issues regarding the increased demand for energy
within the state. As you know, ERCOT has an energy-only market,
which does not necessarily tend to incent new construction of
generation facilities. So the state right now has been
grappling both at the legislative level and within the
Reliability Council on how to incent new generation. And it is
an uncertain market right now. I will just put it that way.
From our perspective, it is very difficult to envision the
construction of a gas-fired power plant where we are located.
The plant is situated at the mine. We are where we are because
that is where the fuel source is, and we are physically
dislocated from the major load demand requirements of our two
customers. And so a gas-fired plant would be more likely built
closer to those higher load demand centers then at the mine
location itself.
Mr. LUETKEMEYER. What do you anticipate your increased
costs to be to be able to comply with the EPA new regs and
rules in order to be able to expand and meet your customers'
needs?
Mr. KEZAR. Are you speaking about the greenhouse gas
regulations?
Mr. LUETKEMEYER. Yeah.
Mr. KEZAR. Well, if the requirement for existing facilities
mirrors the requirements that were contained in the new source
proposed rule--and that is the rule that was proposed in April
of 2012--we could not meet those requirements. There is not
technology commercially available that would allow us to meet
the emissions requirements that were contained within that
proposal.
Mr. LUETKEMEYER. That is a great point. I appreciate you
bringing that out.
Mr. Brown, in your testimony you said that 40 percent of
the cost to production recasting is energy. I have a company in
my district actually who got the number one award for the
casting of the year last year, and so I have toured their
plant. I know what you do. I appreciate what you do.
I did some quick calculations here, and if we--becuase of
where you live--my state is very similar to yours. About 85
percent of the energy that we get is produced from coal, so I
would assume that I think the testimony said anywhere from 30
to 80 percent of the increased cost is the result of going to
something else. If you had to go to natural gas it would raise
your cost of operation roughly 14 percent f4om 40 percent--
excuse me, your energy costs would go from 40 percent to 54
percent of your total budget. You do not have to tell me how
much money you make, but what is your spread? Is it less than
14 percent?
Mr. KEZAR. It is definitely less than 14 percent.
Mr. LUETKEMEYER. So in other words you are going to go out
of business if you cannot raise the cost of the production of
your product to be able to put a margin back in there to cover
not only the cost of the electricity but also something that
you can go to the bank with and keep everybody----
Mr. KEZAR. And that is 100 percent true. I mean, we have to
have a higher margin to be able to invest in future growth and
better electric and everything else. And being a small
business, we do have small margins.
Mr. LUETKEMEYER. I am running out of time here so Dr.
Weinstein, thank you for your comments as well. Can you tell me
what the price of natural gas would have to get down to to be
able to compete with coal so that we would not experience an
increased cost for electric production, energy production?
Mr. WEINSTEIN. Well, as you probably know, natural gas
prices have fallen quite a bit in recent years.
Mr. LUETKEMEYER. Can you turn your microphone on, please?
Mr. WEINSTEIN. I am sorry. Natural gas prices have fallen
considerably in recent years and they are now below $4 in MCF.
When you get down to the $3 range, gas becomes very competitive
with coal. I do not think we are going to get back down to $3,
assuming the economy starts to grow, assuming we can get into
the business of exporting LNG as I indicated earlier, that is
going to increase demand and push up prices. So I do not think
gas is likely to get down to the point where it is going to be
competitive with coal. There are other advantages obviously
that gas has, and certainly, we have an abundance of gas, but
all of the prognosticators that I look at see gas prices
getting back up to the $5 to $7 range, which is kind of an okay
place. It is good for producers. It does not really hurt
consumers. Gas prices tend to be more volatile, a lot more
volatile than coal prices. That is one of the downsides of
relying on natural gas. So it is really hard to say but I think
coal will continue to be the cheapest power source for a long,
long time.
Mr. LUETKEMEYER. Thank you. My time is up. I yield back.
Chairman TIPTON. Thank you for your questions.
Mr. Kezar, I would like to ask you, have you calculated out
should the president's initiative and the EPA's rules go into
effect, how much will that increase the cost for your consumers
in terms of the monthly bill? Have you been able to calculate
that?
Mr. KEZAR. We have estimated that the cost of being forced
to install--and assuming the carbon capture storage equipment
were available--which as I have indicated it is not
commercially available today--but based upon the best estimates
available and the amount of additional parasitic load that is
taken away from power that would otherwise go to customers to
power this additional equipment that is required to capture and
sequester that CO2, the price of power could effectively
double.
Chairman TIPTON. Could effectively double.
Mr. KEZAR. Yes.
Chairman TIPTON. Texas is a pretty popular state right now
and a prosperous state right now.
Mr. KEZAR. Yes, sir.
Chairman TIPTON. Would senior citizens, maybe on fixed
incomes, some young families that find the doubling of their
power costs difficult to be able to accommodate for their
family budget?
Mr. KEZAR. Absolutely.
Chairman TIPTON. Where are they going to go to get that
additional money?
Mr. KEZAR. That is a good question.
Chairman TIPTON. Maybe we ought to ask the EPA and the
president where they are supposed to get the money to be able
to pay the bill. Would you view this basically as taxation via
regulation?
Mr. KEZAR. I am probably not the best person to ask that
question. I am a power plant guy. What I know is that the
regulations are driving up the cost of producing power.
Chairman TIPTON. Mr. Brown, you are in business. You are
working. Is this taxation via regulation?
Mr. BROWN. It could be looked at that way. Yes. But we are
not going to be able to afford to pay those taxes.
Chairman TIPTON. But you are not going to be able to afford
it. I think Mr. Luektemeyer's point in terms of going up to 54
percent of your overall costs and that expands your margins.
Where are your people going to get a job if we have
relinquished those to people overseas?
Mr. BROWN. They are not going to.
Chairman TIPTON. They are not going to be able to do that.
We have got a 7.6 percent unemployment right now, Professor,
and you and I both know that is probably not an accurate
figure; that it is actually much higher when we look at people
that are underemployed; people that have simply given up
looking for work. And I see Mr. Gardner nodding his head in
agreement with that. What is the impact? We are talking about
businesses. Businesses employ people. Is this a way to move
forward or are there more sensible approaches?
Mr. GARDNER. Well, look at it this way. Energy really
drives the economy. There is a pretty close relationship
between economic growth and energy consumption. It is about
0.3. In other words, for every 1 percent increase in GDP
growth, you need a third of a percent increase in energy
production.
What has bothered me in recent years is the fact that
America is rich, the fact that we are abundant in energy, the
fact that we have cheap energy is somehow a bad thing. And in
fact, the availability of abundant and cheap energy is the
basis of our international competitiveness. So why do we
constantly talk about policies that are going to drive up the
cost of energy when those costs, it seems to me, are going to
far exceed any benefits in terms of environmental quality. So
if we want to continue growing this economy, we need adequate
supplies of cheap and abundant energy.
And this is not the forum for me to get on my soapbox, but
why do we behave as though we are an energy-poor nation when we
are an energy-rich nation? I mean, we export a lot of coal. We
should be exporting natural gas. We should be exporting oil.
But there is a mindset, particularly in Washington, that we
have got to husband these resources.
So it seems to me someone who has spent most of his
professional life focusing on economic growth and policies to
encourage economic growth, that we have before us in terms that
have not been spelled out with this climate action policy,
regulation policies that are going to retard economic growth,
not stimulate it.
Chairman TIPTON. So would it be a fair assessment--Mr.
Gardner commented about a sluggish economy right now--to have
an American policy rather than the EPA and the White House, as
opposed to going through Congress to actually develop American
energy on American soil, to be able to put Americans back to
work, to make us competitive in the world and actually make us
prosperous. Is that maybe a good idea?
Mr. WEINSTEIN. Well, absolutely. I am not opposed to green
energy. I remember during the campaign, President Obama was
saying that on his watch, 85,000 jobs had been created in clean
energy. What he did not mention was that 500,000 jobs had been
created in the oil and gas industry with no new federal
incentives.
Chairman TIPTON. There we go.
Mr. WEINSTEIN. But we do not acknowledge that. We do not
acknowledge the fact that we are the richest nation in the
world when it comes to energy. We have produced more coal. We
produce more nuclear. We produce more renewable energy, and we
are number two in oil.
Chairman TIPTON. I would like you to maybe speak just a
little bit, Doctor, if you would, about the reliability on the
electrical grid. As you noted, we do not have the technology
right now to be able to store energy that is generated. I have
a piece of legislation calling for all of the above solutions.
But we have got to make sure that we can deliver that base load
so that Mr. Brown can do his casting and Mr. Kezar is going to
be able to deliver to his consumers as well. Can you talk just
a little bit about----
Mr. WEINSTEIN. Well, understand I am an economist; I am not
a technical person. But when it comes to reliability on the
power grid there are two issues. One is the physical capability
to move electrons around the country, and then two is having
adequate generating capacity to meet peak demand. And my
concern with these GHG regulations is that they will limit,
they will take additional units off stream and that could occur
in a timeframe when alternatives are not available and then we
have to deal with reliability in terms of just having enough
electrons on the grid.
Chairman TIPTON. Just a final question for you, Doctor. The
Regulatory Flexibility Act is a federal statute, and it does
obligate agencies to consider alternative regulatory approaches
if the rule has a substantial economic impact on a significant
number of small entities, and we have heard about those this
morning. How would you rate the EPA's compliance with the
statute?
Mr. WEINSTEIN. I think the EPA is pretty much ignoring the
statute.
Chairman TIPTON. Just ignoring it. Like they ignored this
hearing.
Mr. Brown, a number of experts have credited lower and
stable domestic energy prices for helping contribute to
domestic energy manufacturing rebound. How important are stable
energy prices for your business?
Mr. BROWN. Well, our customers would love that; that way
they could know what their products are going to cost, and when
they do fluctuate, so does the price of those materials. And to
get their materials. So having a constant price would be
wonderful for everybody. And knowing what we could charge you
over here. We can only go to our customers so many times for
price increases, and when the energy fluctuates so much in
price, that changes the price of that product.
Chairman TIPTON. Thank you.
Mr. Kezar, the EPA has recently sent a draft of new NSPS
emission regulations to the White House for review, and it did
not consult small business. Has this been the agency's pattern
for an extended period of time on other rules that affect small
power producers?
Mr. KEZAR. That has been my experience recently. Yes, sir.
Chairman TIPTON. Never bothered to consult you or to be
able to seek your input?
Mr. KEZAR. No, sir.
Chairman TIPTON. The Clean Air Act stipulates that the EPA
can determine that it is not technologically feasible or cost
effective to establish a standard of performance for certain
types of emissions from certain facilities. Mr. Kezar, in your
view does this apply to greenhouse gas emissions from coal-
fired power facilities?
Mr. KEZAR. Well, the problem, Mr. Chairman, is what EPA
effectively did is combined all fossil fuel-fired sources into
one category and then set an emissions limit that was based
upon emissions from a natural gas combined cycle unit and
applied those to all fossil-fuel fired plants. And that is just
not a feasible thing to do. There was no sub-categorization
whatsoever.
Chairman TIPTON. So is the EPA required to establish a
standard that they know is too costly?
Mr. KEZAR. No, sir.
Chairman TIPTON. They are not?
Mr. KEZAR. No, sir.
Chairman TIPTON. We have got some real challenges.
Mr. Luetkemeyer, do you have any further questions?
Mr. LUETKEMEYER. Sure. This is a great panel. I have lots
of questions over here.
Mr. Kezar, with EPA's new standards, the technological
cannot even be reached, how are you going to do that? How do
you anticipate being able to comply?
Mr. KEZAR. As I mentioned earlier, we cannot comply. The
EPA essentially established a rate. It is not a gross amount of
tons of CO2 that can be omitted; it is a rate that is applied
per megawatt of production. So even reducing output from the
facility does not achieve the standard. Unless there is a
technology that is commercially available that can be applied,
we have really no hope of meeting it and continuing to consume
the fuel that we mine at the plant.
Mr. LUETKEMEYER. So what is your alternative then? Shut
down?
Mr. KEZAR. That is right.
Mr. LUETKEMEYER. So effectively, at some point in the near
future, you will shut the plant?
Mr. KEZAR. If the final regulations that are applied to
existing facilities mirror the ones that were proposed in April
of 2012, I do not see any other alternative.
Mr. LUETKEMEYER. Have you discussed with them some sort of
waiver or some sort of extension of any kind?
Mr. KEZAR. No, sir. The rules for existing facilities have
not yet been proposed.
Mr. LUETKEMEYER. Okay.
Mr. KEZAR. We are waiting to see those.
Mr. LUETKEMEYER. How many other plants around the country
are in your position?
Mr. KEZAR. There are a lot of coal-fired plants.
Mr. LUETKEMEYER. Do you have a percentage roughly?
Mr. KEZAR. There are, well, I think we heard earlier that
in excess of 40 percent of the power produced in this country
comes from coal-fired facilities. There are on coal-fired
facilities that can meet the EPA standard as it was proposed.
Mr. LUETKEMEYER. So we are going to have to replace 40
percent of our electrical production, energy production here
shortly?
Mr. KEZAR. Unless some commercially available technology--
--
Mr. LUETKEMEYER. Unless the great FEAT EPA folk decide to
do something different.
Mr. KEZAR. Yes.
Mr. LUETKEMEYER. Amazing.
Mr. Gardner, I am just kind of curious. Do you export any
of your product at all?
Mr. GARDNER. Mostly what we provide is engineering
services.
Mr. LUETKEMEYER. New services? Okay.
Mr. GARDNER. We do have a small portion of our business
that does software for engine health monitoring that we do
export. We have international customers in Europe, and we do
engineering work for them, so we have been able to bring large
contracts from Europe into the United States to work those, so
we have done that. But primarily, our customers are the engine
companies here in the United States.
Mr. LUETKEMEYER. Now, you mentioned small nuclear reactors
a while ago.
Mr. GARDNER. Yes.
Mr. LUETKEMEYER. And that really piqued my interest because
I have got a nuclear plant in my district and they are
competing for a small nuclear reactor grant to be able to
develop and work with the government and work with some other
folks. There are three or four companies that are doing this--
you are probably more aware of it than I am--to try and come up
with ways and to use the spent fuel to go back and recycle it
and actually get rid of the stuff and actually be a positive
force. Can you explain a little about that? Are you familiar
with the process? Can you enlighten us all a little bit?
Mr. GARDNER. I can tell you a little bit about it. I do not
want to get into the particular customers' intellectual
property. But there is an enormous amount of spent military
nuclear fuel which only loses a small portion of its heat and
effectiveness before it is not of a military grade anymore, and
that is stored across the United States. The calculations for
that is that the heat coming off of it now that the storage
facilities have to dissipate and get rid of is an enormous
amount that could be turned into effective electrical energy.
And so these small modular nuclear reactors, at least this one
particular idea, is to go take that and case it safely in a way
that is as safe as it is being stored now and then use that
heat to power turbine equipment to produce power. And that can
be done very effectively. It requires a different cooling
medium and it does require some research to do it, but when it
is done you can then go put that in the ground for 30 years
with the existing fuel and have it produce power.
Mr. LUETKEMEYER. You said there is a new cooling medium
that would be required. What would that be?
Mr. GARDNER. Helium is the one that this customer is
proposing.
Mr. LUETKEMEYER. Okay. Right now it is water; right?
Mr. GARDNER. I am not really familiar with all the other
processes. The helium is something now that is a gas though
that you can actually run through a gas turbine engine. You can
use that instead of air.
Mr. LUETKEMEYER. Very good.
Professor Weinstein, I wish you would really speak up and
tell us what you really think. I appreciate your passion this
morning, I appreciate your comments. They have been very
insightful and from your standpoint as an economist, I am sure
you would like to see some cost benefit analysis done on all
the proposed rules each time; that way we would know how much
it is going to cost our economy and our people with regards to
jobs and the lack of a competitiveness for Mr. Brown and Mr.
Gardner here to be able to sell their products. So I certainly
appreciate your testimony this morning, all of you as well.
So with that I will yield back and thank the chairman or
the Committee for the hearing this morning. And again, bemoan
the fact that we do not have EPA here to listen to the fine
testimony of these gentlemen to be able to understand the
unintended consequences of what their rules do to their
businesses, their way of life, and people in this country's way
of life. Thank you very much.
Chairman TIPTON. I would like to thank my colleague for the
questions. And I had just a couple more, if I may.
Dr. Weinstein, in an effort to be able to justify recent
regulatory activity, the EPA has been citing the social cost of
greenhouse gas emissions. As an economist, could you testify to
any flaws in the EPA's methodology for estimating these costs?
Mr. WEINSTEIN. I have not examined the EPA's technology. I
know that they magically increased the coal costs of carbon
from $21 a metric ton to $35 a metric ton.
Now, I do not know what----
Chairman TIPTON. Do you know what you used for the basis on
that?
Mr. WEINSTEIN. I really have not investigated that. But
social cost is kind of a squishy concept, and economists like
things that we can really put our arms around and measure. And
my concern with social costs, it is not so much the theoretical
issue; it is a measurement issue and how do we really get our
hands around what they would call the negative impacts of
carbon emissions and quantify? I have not examined their
methodology. I know that just yesterday there was I think the
U.S. Chamber held a seminar on the social costs of carbon.
Everybody is kind of looking into it but I think we were all
surprised a week or two ago when all of a sudden that cost
increased from $21 to $35 and nobody seems to know why.
Chairman TIPTON. Well, you might want to hang around for
our next panel and the EPA will--oh, that is right. They did
not bother to show up so we will not actually get an answer
from them.
I think you have pretty much identified this cannot be
accurately quantified.
Mr. WEINSTEIN. Yes.
Chairman TIPTON. That the EPA is grasping for straws in the
wind to be able to justify an agenda which may or may not make
sense but we do not know because they will not bother to sit
down and actually discuss----
Mr. WEINSTEIN. Well, I do not want to impugn any of the
professional staff at the EPA. Maybe they have good analytical
reasons for increasing that number from 21 to 35. It is just
that right now we do not know what those reasons are.
Chairman TIPTON. Right. And it might be helpful if they
actually----
Mr. WEINSTEIN. And the problem is, as you suggest--and
again, I am not--I do not want to impugn the staff at EPA, are
they fudging the numbers to get the costs and benefits to
somehow balance out? And again, I do not know.
Chairman TIPTON. You know, Mr. Brown, it caught my eye. I
am a small businessman. We are a large power user in our local
area through our REA. And you have been pursuing demand
efficiency or it has been imposed on you because you are only
able to actually produce over a 12-hour period. Is increasing
demand efficiency, in your opinion, is that a viable greenhouse
reduction strategy to be pursuing?
Mr. BROWN. Yes. Yes, I do believe it is.
Part of the problem is that operating with the amount of
energy that we need, the technology to produce what the EPA is
talking about and everything else and the electric company is
coming back and talking to us, they do not know what the cost
is going to be. They are telling us our electric rates could go
up as high, as much as 100 more percent because we are coal-
fired. And I do not know what is going to happen then.
Chairman TIPTON. So you are willing to comply to do your
part; you just do not need to be further punished when you are
trying to create jobs and produce a product?
Mr. BROWN. We always try to do our part under regulation,
but the thing is when the demands on waste or whatever it might
be are more stringent than what even possibly can be contained
either by technology or whatever, the technology is just not
even there.
Chairman TIPTON. Well, thanks.
Mr. Gardner, you had noted in your business that you rely
on government investment I guess, if you will, and I am sure we
probably share this--correct me if I am wrong--but you are
probably concerned as all of us are about a $17 trillion debt
in this nation. And if we are looking at that in terms of
investment, it is really best if we get the economy going, is
it not, and we start to actually, rather than punishing
businesses and increasing their costs, let us get the American
economy moving once again and create jobs?
Mr. GARDNER. Well, I think that is true. I mean, I have
four children. I do not want to give them a crushing debt as a
legacy from me. At the same time, I do not want to give them an
environment that is not sustainable. I cannot speak to all of
the things in the president's budget, but I do think there
needs to be a hard look to look at the priorities of that
budget to determine where the important areas are that we need
to invest money and where are the areas in which industries
that have been receiving subsidies for decades, that it is time
that they stand on their own feet and move on and where the
other areas need to be invested. I mean, there is wasteful
spending, but there are also areas that are not getting the
funding that they need. And if we want to do renewables, if we
want to do these things, a lot of what I have heard here so far
has been we do not know if it is going to be ready. We do not
know if it is going to be ready. Well, I can tell you from our
perspective, we spend a lot of time in start and stop modes
with those projects whether they are internally funded by our
customers or whether the government subsidies, government
grants, government contracts, because they go on for a time,
they make a little progress, and then they wait and they fret
and they argue. And so if we are going to get on renewables, we
need to go set a path and get on with those so that we have the
ability to make that choice whenever it is time to go look at
these. It is hard because companies like Mr. Brown's, we buy
product from those companies and we see that direct impact, it
happens to them. So I do fully appreciate the position he is
coming from. If it costs him more, it is going to cost me more
to go buy a product from him. So we understand that as well. I
think it all needs to be balanced.
Chairman TIPTON. Thank you so much.
We certainly want to be respectful of your time and would
like to thank all of our witnesses for taking the time to come
before this Committee today. You all provided valuable insight
into how the government's actions in Washington affect real
people, affect small businesses in the real economy that we are
all struggling with right now.
It is unfortunate, again, that officials from the EPA chose
not to testify at today's hearing. If they had, I am sure that
they would better understand the importance of involving small
businesses early in the rule-making process, and this would
benefit not only small businesses but I believe the EPA as
well.
As a Committee, we have examined this a number of time. The
present and future prosperity of our economy and the viability
of small businesses in the global marketplace are truly
dependant on access to secure and affordable energy sources.
That has been a great key to the American success story as I am
sure Dr. Weinstein can attest to.
For far too long, policymakers in Washington have acted as
if the United States is an energy resource foreign nation as
you noted, sir, when that is far from the case. Resources, like
coal--coal in my district--are important sources of energy and
feedstock for small businesses in rural communities throughout
much of the Midwest and our mountain states. While many in
Washington pay lip service to the importance of developing an
all-inclusive, ``all of the above'' energy strategy, proposed
regulations such as those outlined in the president's Climate
Action Plan will undermine our goal of energy independence and
weaken our already fragile economy. Should the Obama
administration continue what many of us see as a war on coal,
small businesses and the people who you are providing a service
to--senior citizens and young families on fixed incomes--will
be the first casualties.
I ask unanimous consent that members and the public have
five legislative days to insert statements and extraneous
material for the record. Hearing no objection, so ordered.
The Committee is now adjourned. Thank you again, gentlemen,
for being here.
[Whereupon, at 11:12 a.m., the Subcommittee was adjourned.]
A P P E N D I X
Written Testimony Submitted by Mr. Michael Kezar
General Manager
San Miguel Electric Cooperative, Inc.
U.S. House of Representatives
Committee on Small Business
Subcommittee on Agriculture, Energy and Trade
Hearing:
The President's Climate Action Plan: What Is the Impact on Small
Business?
July 18, 2013
Good morning. My name is Mike Kezar, and I serve as the
General Manager of San Miguel Electric Cooperative, Inc. I
appreciate the invitation to appear before the subcommittee
today to discuss the potential impact that regulating carbon
dioxide emissions under New Source Performance Standards (NSPS)
provisions of the Clean Air Act could have on San Miguel and
its 26 member cooperatives.
San Miguel is a Rural Electric Cooperative Corporation
organized for the sole purpose of owning and operating a mine-
mouth, lignite-fired generating plant and associated mining
facilities in Atascosa County, approximately 60 miles south of
San Antonio, Texas. Power produced from the San Miguel facility
is furnished exclusively to Brazos Electric Power Cooperative,
headquartered in Waco and South Texas Electric Cooperative,
headquartered in Nursery. Through the 24 retail distribution
cooperatives they serve, power from San Miguel flows to rural
electric cooperative members throughout the state of Texas. As
a not-for-profit cooperative, San Miguel does not have
shareholders and the total cost of owning and operating the
plant, including any compliance costs associated with the
regulation of CO2 emissions, will be borne directly
by the cooperative consumer/members served by Brazos and South
Texas Electric Cooperatives. Additionally, San Miguel's annual
sales of electricity total less than 3 million MWh, placing it
will under the 4 million MWh ceiling with the Small Business
Administration uses to classify electric utilities as small
business entities.
Before I address my specific concerns with NSPS regulation
of greenhouse gases--including CO2--I want to stress
that the Clean Air Act is not the appropriate vehicle for the
regulation of greenhouse gas emissions for several important
reasons. First, any meaningful effort to reduce emissions must
necessarily involve tough economic and public policy choices
that would significantly impact the nation as a whole. These
are choices that must be made by the U.S. Congress, acting as
direct representatives of the people, with the transparency and
participation allowed through the legislative process. This
cannot be left up to Washington bureaucratic agencies. Second,
reducing greenhouse gas emissions in the U.S. alone will have
no significant impact on worldwide inventories. These
reductions, however, would likely have a notable impact on our
nation's ability to compete in the international marketplace.
The price of virtually all products and services would
necessarily increase as the cost of compliance for industry,
particularly the electric generation industry, is spread
throughout the various economic sectors. Therefore, any
significant effort within the U.S. to address greenhouse gas
emissions must only be undertaken as part of an overall
international initiative that properly balances domestic and
international interests. The Clean Air Act is clearly not
structured to mandate or allow the appropriate balancing of
these interests and public policy concerns.
Unfortunately, and despite the flaws outlined above, the
administration has announced its intention to regulate
greenhouse gas emissions under Section 111 of the Clean Air
Act, and has set timetables for establishing New Source
Performance Standards for both new and existing fossil fueled
electric generation facilities. This means that the
Environmental Protection Agency will have to re-propose an NSPS
for new sources. The fact that EPA is now pursuing a different
regulatory path is particularly important, given the fact that,
as with the original proposal and now with the anticipated re-
proposal, there is no commercially available technology to
significantly reduce CO2 emissions. That means there
is no ``best demonstrated technology'' or ``best system of
emission reduction'' as called for under Section 111 of the
Clean Air Act that would produce meaningful reductions in
CO2 emissions from fossil fueled electric generation
facilities.
Nonetheless, EPA appears intent on regulating fossil fueled
electric generation under Section 111 by re-proposing a rule
directed at new sources, followed by guidelines for states to
follow in regulating existing sources. The regulation of
existing sources is required by Section 111, after NSPS for new
sources is established. The cost impacts of these regulations,
particularly on new and existing coal-fired generation, and
especially on small business entities such as San Miguel, could
be catastrophic.
EPA's NSPS CO2 standards for new coal-fired
generation were initially proposed in April 2012. This proposal
is to be withdrawn, with the President requesting a new
proposal no later than September 20, 2013. Any new proposal,
however, should not include the same technical and legal flaws
as the April 2012 proposal. One of the primary flaws was the
combination of coal-fired and natural-gas fired electric
generation facilities into a single regulated category for the
purposes of the rule and then establishing one emissions limit
for that entire category. This combination of various types of
generation facilities into one-large source category is
unprecedented for this type of rule. Coal-fired and natural-gas
fired electric generation units are very different, and
combining them makes no practical sense, flies in the face of
decades of EPA Clean Air Act precedent, and likely violates the
Clean Air Act's requirements regarding subcategorization of
different types of source categories.
Unfortunately, due to a language quirk in Section 111 of
the Clean Air Act, any unit constructed or modified after the
proposal of the rule must comply with standards applicable to
new units. This short-circuits a common sense approach to
regulating facilities only after considering public comment on
the proposal. The April 2012 proposal did allow
``transitional'' sources, essentially those close to beginning
construction, a one year transitional period to begin
construction without meeting the proposal CO2
standards. However for generation sources not that far along in
the planning process, the proposal mandated one emission
standard--based upon natural gas-fired generation--for all new
sources, including coal-fired generation facilities. EPA
admitted that new coal-fired generation was incapable of
meeting that standard, and the proposal allowed potential new
units the option of meeting an interim standard, coupled with
required Carbon Capture and Storage, or CCS, utilization to be
applied in the future. The technical and economic uncertainties
inherent in constructing new coal-fired generation with the
absolute mandate to install in the future a technology that is
not currently commercially available has the effect of ensuring
that no new coal-fired generation facility will be built, at
least within the foreseeable future. Furthermore, since the
requirements were contained in a proposed regulation, they were
not subject to a court challenge. Stop and think about that.
Practically speaking, you cannot build a power plant in the
United States of America using coal--the one fuel that we have
more of than any other nation. The one fuel that mine-mouth
facilities like San Miguel know will not be subject to price
volatility and we are going to take that off the table. I
cannot think of another point in history that any nation has
ever done something so clearly against its economic and
national security interests.
Section 111 of the Clean Air Act requires that cost be
taken into account when developing NSPS for both new and
existing units. While I fully support the development of
technologies that would cost effectively reduce CO2
emissions from coal-fired generation facilities, presently no
such technology is commercially available. Carbon Capture and
Storage may be technically possible but its practical and
economic viability is very uncertain. Deployment of CCS
technology would effectively double the cost of power produced
by coal-fired electric generation facilities and there is no
evidence that this technology will become commercially
available anytime in the near future. If EPA were to make CCS
applicable to the San Miguel unit, now or in the future, the
unit would likely have to cease operation due to this doubling
of power costs. This technology clearly does not meet the NSPS
mandate for cost consideration.
Since there are no commercially available technologies that
can produce meaningful reductions in CO2 emissions
and satisfy Section 111 NSPS cost viability requirements for
coal-fired generation, EPA may well formulate NSPS regulatory
policy that requires the use of natural gas in lieu of coal for
electric power generation. Additionally, I expect EPA to
propose that states develop guidelines that would require
physical changes at existing units, such as the San Miguel
unit, to gain, at best, moderate efficiency improvements, to
thereby reduce CO2 emissions a few percent for every
MWh of electricity produced. Although Section 111 requires that
any NSPS be economically achievable at the unit, my concern
here is that EPA will force guidelines on states that are
unrealistic and couple them with, in effect, requirements for
emissions averaging or off-sets with natural gas or renewable
generation. While this approach may be viable for larger
electric utilities with broader generation portfolios, it would
not be viable for San Miguel or other small electric utilities
whose generation is primarily coal-based.
I want to make it clear I do not oppose flexible regulatory
compliance options, but such options cannot substitute for the
ability to comply cost-effectively at the individual unit
level. Compliance cost for a single coal-fired generation
facility small business entity must be affordable. Since
companies like San Miguel, with only one facility, have no
opportunities to average emissions using these concepts, this
is simply not feasible, let alone affordable.
Lastly, I want to address the absolute necessity that EPA
follow the requirements of the Regulatory Flexibility Act. In
this case, the act mandates that EPA take steps to minimize the
economic impact that Section 111 regulations would have on
small business entities such as San Miguel. Unfortunately, EPA
has a poor track record recently of following its own
guidelines regarding the formation of Small Business Regulatory
Enforcement Fairness At (SBREFA) panels for the purpose of
meeting the Regulatory Flexibility Act mandates.
For example, EPA's guidelines require that small business
representatives who participate on Small Business Regulatory
Enforcement Fairness Act panels be given adequate background
information on the rulemaking, as well as options to lessen the
economic impact on small business entities of the regulatory
program in question. However, in the last two Clean Air Act
major rulemakings directed at fossil-fuel fired electric
generation--the new source NSPS and the UMATS rules--EPA failed
to provide small business representatives with any regulatory
options, let alone allowing an opportunity for panel members to
meaningfully comment on alternatives to lessen economic impacts
on small businesses.
I am especially concerned that EPA may seek to skirt a
responsibility to minimize the regulation's impact on small
business entities under the guise that the guidelines
themselves do not directly affect small business but rather
that the State Implementation Plans would. While I believe that
small businesses should be afforded full participation as
contemplated in the SBREFA on any potential NSPS rule, at the
very least, EPA should conduct comprehensive consultations with
small business electric utilities in an effort to minimize
impacts on small entities even if such efforts are not
conducted under the auspices of the SBREFA. In fact Executive
Order 13563, as well as the president's June 25, 2013
Memorandum entitled Power Sector Carbon Pollution Standards,
clearly advocate, at the very least, that policy formulation
not prejudice small business entities. An upfront consultation
process involving small business entity representatives would
be an excellent opportunity for the administration's own
objectives to be satisfied.
That concludes my statement. I thank the subcommittee for
the opportunity to address these important issues. I would be
glad to answer any questions you may have.
[GRAPHIC] [TIFF OMITTED] 81938.001
Good Morning, Chairman Tipton, Ranking Member Murphy, and
members of the Subcommittee, thank you for the opportunity to
testify before you on this timely subject of The President's
Climate Action Plan: What Is the Impact on Small Businesses?
My name is JB Brown and I am President of Bremen Castings,
Inc. (BCI) in Bremen, Indiana--a small town of about 5,500
people roughly 15 minutes south of South Bend/Elkhart. As a
small business that is energy intensive, I am very concerned
that the regulations proposed by President Obama on the utility
sector to force a quick reduction in carbon emissions would
place my company and the entire U.S. foundry industry at a
substantial disadvantage to our foreign competitors and will
invariably raise our electricity costs. Metalcasting is one of
our nation's oldest and most important industries. It is the
most cost effective method to manufacture a shaped metal
component. The process consists of pouring molten metal
(virtually any type of metal) into a mold made of sand, metal
or ceramic, to form geometrically complex parts.
Today, the metalcasting industry remains critical to the
U.S. economy, as 90 percent of all manufactured goods
incorporate engineered castings into their makeup. Castings are
used in cars, trucks, planes, railroads, ships, all types of
machinery, air conditioners, refrigerators, lawn mowers, oil
and gas field equipment, medical devices, water infrastructure,
kitchen appliances, wind turbines, tanks, bombs, mining and
agricultural equipment--just to name a few areas. In short,
castings represent a vital, yet very basic, aspect of our
everyday lives.
I am proud to be a fourth generation Indiana metalcaster
and president of this family-owned small business that has been
in continuous operation for over 75 years. My great-grandfather
founded our foundry in 1939, which was originally established
to produce manhole covers, furnace grates, pumps, truck parts
and natural gas parts for its customers. Growing up I spent
many hours around the foundry and continuing my experience
through high school and college. I have worked every job, every
shift throughout our 155,000 square foot facility. Both my
parents' fathers worked in this plant and today we still have
other families that are currently in their 4th generation as
well. More recently, my daughter, representing the fifth
generation, has been learning the business interning in the
foundry and machine shop every chance she gets when she is on
break from school at Indiana University.
After weathering a number of recessions and overcoming
changes in the marketplace, our foundry continues to be a
leading metalcaster producing thousands of different types of
gray & ductile iron castings ranging in weight from .5 pounds
to 100 pounds. Our team of over two hundred and fifty
associates today manufactures an array of castings for heavy
duty trucks, agricultural equipment, valves & pipe fittings,
pump components, compressors, lawn/garden equipment, as well as
a variety of critical parts for Humvees and Oshkosh Defense for
the U.S. Department of Defense. BCI has been a long time
supplier to John Deere and Case New Holland in the agriculture
sector, as well as Eaton in the heavy truck sector. We are now
exporting castings for agricultural equipment to Brazil,
France, Mexico and Canada.
Metalcasting Industry is Critical to the U.S. Economy
By way of background, the U.S. metalcasting industry is the
world's second-largest producer of castings, after China. Metal
castings are truly the foundation for all other manufacturing.
Foundries produce both simple and complex components of
infinite variety. Castings are seldom seen or identified by
consumers, because they are normally component parts found
inside assemblies.
The U.S. foundry industry is comprised of 2,000 operating
casting facilities, with over 50 of these plants located in
Indiana. Approximately 600 foundries produce iron and steel
castings, while another 1,400 manufacture aluminum, brass and
bronze castings. Metalcasting plants are found in every state
in the nation, with the highest geographic concentration of
facilities located in Alabama, Ohio, Pennsylvania, Indiana,
Illinois, Michigan, California, Texas, and Wisconsin. Foundry
locations have traditionally been sited close to raw materials,
coal, water, and transportation. More recently, a few new
foundries have been built in states with inexpensive
electricity, as well as proximity to their customers.
The American metalcasting industry provides employment to
over 200,000 men and women directly and supports thousands of
other jobs indirectly. The industry supports a payroll of more
than $8 billion and sales of more than $32 billion annually.
Our industry is dominated by small businesses, with over 80
percent of U.S. metalcasters employing 100 workers or less. In
fact, many are still family-owned, like BCI.
Castings have applications in virtually every capital and
consumer goods. Metal castings are used in cars, trucks,
railroads, ships, all types of machinery, air conditioners,
refrigerators, lawn mowers, medical devices, weight lifting
equipment, oil and gas field equipment, water works, mining,
wind energy, and agricultural equipment. The major industries
supplied by our industry include agriculture, construction,
mining, railroad, automotive, aerospace, communications, health
care, defense, and national security. Cast metal products are
integral to our economy and our way of life.
Metalcasting Involves Energy-Intensive Processes
Metalcasting is among the most energy-intensive industries
in the United States. The heating and melting of metals consume
large amounts of energy, accounting for about 55% of the total
energy used. Mold making, core making, heat treatment and post-
cast operations use significant energy as well.
Compared to other foundry sectors, energy costs are
typically higher for iron foundries, such as BCI. Most iron
casting work is done at temperatures up to 2850+ F, with
subsequent heat treating done at up to 1900+ F. The melt
temperature is much higher for gray and ductile iron compared
to non-ferrous metals. In addition, our foundry utilizes two
different types of furnaces--one called a cupola furnace that
utilizes foundry coke to reach these high temperatures, and the
other is an electric melt furnace. Approximately half of the
total energy used in iron foundries with cupolas is consumed in
these furnaces. Typically, our cupola furnaces cannot be turned
off during the production cycle. The electric melt furnace is
never shut down. It remains operating twenty-four hours a day--
365 days a year. Basically, 40 percent of our energy costs come
from the cupola furnaces, while 60 percent comes from our
electric melt furnaces.
We are already restricted by the utilities from when we can
run our furnaces--essentially during non-peak hours from 6:00
p.m. to 6:00 a.m.--this basically limits us to just two work
shifts--a night shift and morning shift. If we were to violate
our agreement, we would be fined $15,000 for the month. It's
already a burden to find top management and other skilled
workers, but trying to find that same talent to work the late
night shift is almost impossible.
In addition, our energy-intensive operations have forced
the foundry industry to find ways to become more energy
efficient in order to remain competitive. The industry has made
good progress in reducing its energy costs by developing and
adopting more efficient equipment and by making changes in some
of its processes.
Over the past two years, Bremen Castings has worked
diligently to cut some of our energy costs and become more
energy efficient. In fact, we made a significant investment of
over a half-million dollars in a variety of energy-savings
projects including: replacing old lighting with energy
efficient fluorescent lighting ($65K); switching out old air
compressors with energy efficient electronic compressors
($300K); installing new premium efficient electric motors and
drives ($75K); updating furnace to use less coke and get same
melt rate ($100K); adding extra insulation in the roof for
heating in the winter ($50K); adding foot pedals for on-demand
air for machines instead of constant air supply ($15K); and,
installing an on-demand hot water for the plant ($50K).
Additionally, we are no longer purchasing incandescent lighting
and have replaced lighting fixtures with LED lights. We are
also recouping waste heat from air compressors to heat in
winter.
Despite being an energy-intensive industry, foundries are
major recyclers. Most castings are manufactured from recycled
scrap materials rather than new or ``virgin'' materials as melt
stock. Annually, U.S. foundries consume 15-20 million tons of
recycled scrap metal, giving new life to products that would
otherwise go to landfills. As a result, foundries take tens of
thousands of old cars from our nation's highways, as well as
broken radiators, water meters and other discarded metal
products for use in the manufacture of our castings.
The foundry industry believes that it is imperative for
America to continue to expand access to our domestic energy
supply in order to meet current needs for affordable energy and
shore up our energy security. Oil, natural gas and clean coal
remain essential contributors to America's energy security. In
addition, we strongly support the building of the Keystone XL
Pipeline and urge the U.S. Department of State to approve the
Presidential Permit necessary for this project to move forward.
The foundry industry supports an energy strategy that
embraces all forms of domestic energy production, including
nuclear power, hydropower, alternative fuels and renewable
energy sources like wind energy and solar power. We are pleased
to see the technological advancements in fracturing which have
led to an abundance of natural gas production in the U.S. that
is fundamentally changing the energy landscape. The result in
the growth of all these sectors has provided more work for the
foundry industry, more jobs, and consistently lower domestic
natural gas prices in what has known to be a historically
volatile market.
Continued access to affordable energy sources will help
U.S. foundries and our customers better compete against growing
global competition and allow us to keep and create more jobs in
the U.S.
Impact of President Obama's Plan to Regulate Power Plants
on Indiana Foundries
As an energy-intensive manufacturer, I am very concerned
about the consequences of the President's plan outlined on June
25th to regulate greenhouse gas (GHG) emissions from new,
modified, and existing power plants on my foundry, our industry
and manufacturers across the U.S. I believe these new rules
will cause power plants to close, drive-up power costs for
households and businesses across the country, and especially
harm manufacturing-heavy states. Additionally, these new
regulations abandon an all-of-the-above energy policy and will
threaten the foundry industry's ability to remain competitive
in this international manufacturing environment. We compete
globally against countries, like China, where the industry is
often state-owned, controlled and subsidized, including for
electricity costs.
Furthermore, the proposed rules will adversely affect
Indiana manufacturers and consumers, much more than most
states. Indiana is a top energy-using state, and most
electricity comes from coal-fired power plants. Currently, coal
generates about 40 percent of electricity in the U.S. However,
in Indiana, more than 80 percent of our electricity is
generated from coal-fired power plants. The proposed utility
rules will make Indiana manufacturers, including BCI, less
competitive with other states that aren't coal dependent and
countries that don't have strict rules in place, ultimately
costing jobs.
Increasing regulations is also unfair to many of these coal
dependent regions of the country and will encourage fuel-
switching, since there are no proven technologies to control
carbon dioxide (CO2) emissions from power plants. The shift
from coal to natural gas is already well underway due to the
low price of natural gas and other EPA Clean Air Act
regulations. However, certain areas of the country, including
many of the states where there is a high concentration of
foundries (i.e. the Midwest), have more abundant coal sources;
whereas, other regions are better suited for production from
wind and solar sources. The Administration's plan makes coal-
fired electricity supply less affordable and less reliable to
major industrial customers, which will threaten the loss of
valuable manufacturing jobs. For foundries, wind and solar
don't have the reliability, affordability or the capacity that
you have with fossil fuels. In northern Indiana, it would be
challenging to power a foundry on alternative energy year-
round, as we do not have a lot of sunny days in the winter.
Indiana utilities have long relied on coal because it's
been a stable and abundant low-cost source of fuel. In fact,
this supply of coal from the southwestern part of the state has
enabled utilities to offer some of the nation's lowest
electricity rates for years. These relatively low electric
rates have helped to keep our foundry and other Indiana
metalcasters more competitive against foundries in other
states, as well as our foreign competitors.
For foundries in coal dependent states like Indiana,
Wisconsin, Ohio and Pennsylvania, there is no doubt the cost to
produce castings will increase. With the continued sluggish
economy, many foundries across the country are reluctant to
hire new workers given the continued uncertainty in regards to
energy prices, health care costs, cuts to defense programs,
potential changes to the U.S. tax code, and new federal
regulations from the U.S. Environmental Protection Agency (EPA)
and the Occupational Safety and Health Administration (OSHA).
Energy is the lifeblood of U.S. foundries and most
manufacturers and even the slightest competitive advantage in
the price of energy can make an enormous difference for
companies like mine that compete globally. Like all
manufacturers, we benefit from the decreased production costs
attributable to lower energy prices.
For many metalcasters energy is a significant expense, only
behind raw materials and labor in terms of the costs of doing
business. When coal and natural gas are both a key input and a
main cost driver, market volatility makes it extremely
challenging to plan and to remain competitive. Furthermore, due
to the competitive nature of our industry, cost increases can
rarely be passed onto our customers. Since state laws allow the
power companies to pass all energy and environmental compliance
costs through to the consumer, we expect our energy prices to
increase substantially due to these new EPA regulations. Even a
$0.01/kWh increase in the cost of electricity imposes
additional costs of nearly $9 billion per year on domestic
manufacturing facilities.
Another key factor will be how much time the EPA will allow
the utilities to comply with the new power plant rules. We will
be closely watching to see how the EPA handles the transition
period to minimize the cost and reliability impacts, especially
on states like Indiana that are still dependent on coal-
intensive electricity generation.
In addition, we remain concerned that the EPA continues to
fail to consider the cumulative impact of its power sector
regulations on grid reliability. In fact, no comprehensive
study has been done to assess the effect on the price of
electricity, jobs, reliability of electricity supply, and the
overall economy. The Federal Energy Regulatory Commission
(FERC) has questioned whether the compliance deadlines set
forth in other EPA regulations are too expeditious to allow
sufficient lead-time to replace retiring resources. So far,
over 140 coal-fired electricity-generating units in 19 states
have announced they will retire by 2015. These retirements will
create volatility within the electric grid if steps are not
taken to balance the retirements with new capacity.
Conclusion
As an energy-intensive industry comprised primarily of
small businesses, metalcasters are troubled by the prospect of
increased electricity costs and reliability issues that will
likely result from the Administration's new power plant
regulations being developed. Establishing new stringent and
burdensome regulations on the power sector will have a negative
effect on all U.S. manufacturers, regardless of company size,
consumers, the long-term health of the U.S. economy and the
prosperity of American workers. As we are transitioning our
power generating fleet, utilities need flexibility to ensure
that they can manage these emerging environmental regulations
while continuing to control costs. We don't need more
regulatory road blocks as the country and our industry
struggles out of the recession.
Foundries need a secure and reliable supply of electricity
at affordable rates in order to remain competitive. Without
healthy production growth in manufacturing, we believe
acceptable progress on the hiring front will be impossible.
Thank you for the opportunity to appear before you today. I
look forward to your questions.
Bernard L. Weinstein, Ph.D.
Associate Director, Maguire Energy Institute
Cox School of Business
Southern Methodist University
Before the Subcommittee on Agriculture, Energy and Trade
of the House Committee on Small Business
July 18, 2013
Mr. Chairman and Members of the Subcommittee, I am Bud
Weinstein and I am the Associate Director of the Maguire Energy
Institute at Southern Methodist University (SMU) and an adjunct
professor of business economies at SMU's Cox School of
Business. Thank you for this opportunity to address the
President's climate action plan and its impact on small
business.
Several weeks ago, President Barack Obama released his
``Climate Action Plan.'' Specifically, he wants to use his
executive power to limit carbon dioxide (CO2) emissions from
both new and existing power plants, further increase fuel
economy standards for motor vehicles, and provide additional
incentives for the development of renewable energy sources.
Among these initiatives, the potentially most damaging to the
economy, and small businesses in particular, are those related
to power generation.
Electricity drives our economy, and almost 40 percent of
the electrons on the grid come from coal-fired power plants,
which will be most affected by mandates to reduce CO2 emissions
and other greenhouse gases (GHG). Coal's contribution to the
electricity mix has been slowly declining in recent years,
mainly because of a sluggish economy and comparatively cheap
natural gas prices. And though we haven't yet seen the
specifics from the Environmental Protection Agency (EPA), the
forthcoming GHG standards will unquestionably accelerate plant
closures. The consequences, in terms of higher energy costs and
compromised grid reliability, could be serious. The new
standards could also derail America's nascent industrial
revival while eroding the competitiveness of US manufacturers.
Hundreds of thousands of jobs are at risk--not a happy prospect
in an economy that's barely growing four years after the Great
Recession with a 7.6 percent unemployment rate, 12 million
workers currently unemployed, and millions more underemployed
or discouraged from even looking for work.
The outlook is even gloomier for small business enterprises
who have historically been the primary job producers in our
economy. Businesses with fewer than 500 employees, along with
sole proprietorships, account for about two-thirds of the
nation's employment. But the country's rate of new business
development is sliding. According to the US Bureau of the
Census, the rate of new business formation has fallen to
between 7 percent and 8 percent (as a portion of all
companies), down significantly from the rate of 12 percent to
13 percent in the 1980s.
As Robert Litan of the Kauffman Foundation has observed,
``Without the new jobs created by business startups, the Great
Recession would have been even deeper, with many more jobs
lost.'' \1\ But the Foundation finds that businesses less than
five years in existence now represent merely 35 percent of all
companies, down from the 50 percent they represented three
decades ago. The share of employment at these young firms has
fallen from 20 percent to 12 percent in recent years, a trend
that's present to some degree in every single state, with those
in the West, South, and Southwest regions seeing the greatest
drop-offs in entrepreneurship.
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\1\ A Cited in L. Mutikani, ``U.S. Business Startups at Record
Low,'' Reuters, May 2, 2013.
Government regulations and red tape are already a
tremendous barrier to small business growth. By the House Small
Business Committee's own reckoning, small enterprises bear
regulatory compliance costs that are 36 percent higher than
large businesses. By driving up energy costs, the forthcoming
EPA greenhouse gas regulations will place additional burdens on
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those enterprises that provide most of the jobs in America.
Likely negative impacts of forthcoming GHG regulations:
higher electric power costs and impaired grid reliability
Every 1 percent increase in economic output necessitates a
0.3 percent increase in energy use. By extension, any
combination of policies that serves to increase the price of
electricity or reduce the reliability of energy sources will
have a negative impact on economic growth. Higher power costs
can be especially detrimental to manufacturing industries, who
consume proportionately more electricity than other sectors of
the economy. Five million manufacturing jobs were lost during
the Great Recession, and very few have come back during the
recovery. But manufacturing still matters because of its strong
linkages with other sectors of the economy. About one in eight
private sector jobs, mainly in small and medium-size
businesses, rely on America's manufacturing base.
Within the past few years, EPA proposed two new air quality
rules that would prove extremely costly to America's utilities
and manufacturers: (1) the Cross-State Air Pollution Rule
(CSAPR) that would cap key emissions crossing state lines and
(2) the Utility Maximum Achievable Control Technology Rule
(MACT) that would set absolute limits on mercury and other
chemical emissions. The CSAPR was overturned by the D.C.
Circuit Court of Appeals and is now under review by the US
Supreme Court.
The Utility MACT may prove to be the most expensive direct
rule in EPA history. Indeed, EPA itself has estimated it will
impose costs of about $11 billion a year on the US economy,
though third-party estimates of compliance costs are
considerably higher.\2\ For example, an analysis by National
Economic Research Associates (NERA) finds that complying with
the proposed standards will cost power companies close to $18
billion per year for the next twenty years.\3\ Some coal-fired
plants will be so expensive to retrofit to comply with the
standard that they will simply be shut down. The NERA study
projects that about 48 gigawatts of coal generation may be
retired by 2016, representing a 13 percent decline. New natural
gas generators would be the most likely substitutes for these
shuttered facilities, and the increased demand for gas is
estimated by NERA to push up gas prices by about 17 percent by
2016. Higher prices, in turn, will increase natural gas
expenditures by the residential, commercial, and industrial
sectors of the economy by $85 billion (present value over 2011-
2030 in 2010$) or $8.2 billion per year. Average retail
electricity prices could jump by about 12 percent with some
parts of the country recording increases as high as 24 percent.
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\2\ US Environmental Protection Agency, Regulatory Impact Analysis
of the Proposed Toxics Rule: Final Report,'' March 2011.
\3\ National Economic Research Associates, Proposed CATR + MACT,
May 2011.
In addition to CSAPR, Utility MACT, and forthcoming GHG
regulations, EPA has promulgated several other rules that will
affect the utility sector. These include air quality standards
for sulphur dioxide, nitrous oxide, and fine particulate matter
as well as new standards for ash and other residuals from coal
combustion. Taken together, these regulations will impact about
400,000 megawatts (MW) of oil and coal-fired power generation,
almost 40 percent of currently available US capacity. Should
all of the proposed implementation deadlines remain unchanged,
the reliability of the entire US power grid could be
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compromised.
The utility industry is already laboring to comply with
these and a myriad of other EPA mandates. The result could well
be a reduction in reserve margins, making less power available
during periods of peak demand or plant outages. Imagine what
would have happened in Texas and other southern states that
rely heavily on coal-fired generation during the record summer
heat wave of 2011 if adequate reserve power had not been
available? Not only would many energy-intensive industries have
been forced to shut down, but rolling blackouts could have put
the public's health at risk in the face of 100 degree
temperatures week after week.
This prospect was highlighted by the Electric Reliability
Council of Texas, which operates the state grid, which stated
that likely production cuts to comply with the proposed CSAPR
rules alone would have threatened the state's ability to keep
the lights on.\4\ American Electric Power Company has stated it
will retire nearly 6,000 MW of generating capacity if the CSAPR
rule is reinstated while Duke Energy will shutter 862 MW and
Georgia Power another 871 MW.\5\ Should the EPA promulgate
costly emissions reduction standards for GHGs, even more
generating capacity is likely to go offline, further weakening
the integrity of the power grid.
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\4\ ``Energy Future Holdings envisions cutting power production to
comply with EPA rules,'' Dallas Morning News, July 30, 2011.
\5\ ``Dozens of coal factories forced to shut down in response to
strict EPA regulation,'' Business Insider, August 9, 2011.
At the same time, by substituting higher-cost electricity
(natural gas) for lower-cost electricity (coal), many energy-
intensive industries could see their overall production costs
rise while their competitive advantages in the global
marketplace decline. At risk are not only hundreds of thousands
of high-paid jobs but a worsening of America's balance of
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trade.
Some have suggested that the benefits of carbon reduction
outweigh its regulatory costs. However, unilateral carbon
regulations in the US will do little to affect global warming
which is, as the name implies, a global phenomenon. As the EPA
has noted, ``climate change presents a problem that the United
States alone cannot solve. Even if the United States were to
reduce its greenhouse gas emission to zero, that step would be
far from enough to avoid substantial climate change.'' \6\
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\6\ US EPA, Technical Support Document, Social Cost of Carbon for
Regulatory Impact Analysis (February, 2010) at 10.
A flawed proposal from the Natural Resource Defense Council
---------------------------------------------------------------------------
(NRDC) to lower GHG emissions
The NRDC is proposing that the EPA set an emission standard
for carbon dioxide from existing power plants that would vary
by state. The standards would not describe the required
technology or even the total amount of allowable GHG emissions.
Instead, the NRDC argues that EPA should:
Calculate each state's ``baseline fossil
fuel fleet generation mix of coal-and-gas fired plants
for 2008 through 2010'';
Establish nominal carbon dioxide emission
rate targets for coal- and gas-fired power plants;
Determine each state's emission rate
standard as a function of the state's nominal targets
weighted by the state's generation mix;
Allow the use of emission rate averaging
across fossil-fuel fired units and create a system to
credit emission reductions achieved from increased use
of non-emitting power plants and increased demand-side
energy efficiency; and
Create a system allowing states to consent
to combine their power plants fleets into a multistate
region for compliance purposes and to permit states to
trade emission credits on a multistate exchange.\7\
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\7\ National Resources Defense Council, Closing the Power Plant
Carbon Pollution Loophole, December 2012.
Taken together, this collection of regulatory mandates is
unprecedentedly broad in its effect. This proposal would have
the EPA create and manage a hybrid inter- and intrastate cap-
and-trade system for carbon emissions, would require federal
oversight and micromanagement of virtually every aspect of
electricity generation in every state, and would also require
EPA oversight of how much electricity is consumed in states as
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a part of its demand-side efficiency (DSE) mandates.
Putting aside the questionable legality of the approach to
GHG reductions proposed by the NRDC, their argument for
creating a new carbon control regime is built around
unrealistic assumptions. The truth is that neither NRDC nor any
other proponents of the proposal have described how exactly it
should be used. NRDC fails to specify how any of the proposed
measures would be practically enforceable and what objective
standards would apply to ensure sources, regulations, and the
public can clearly determine if compliance is being achieved
and if compliance is realistically possible.
For example, the proposal envisions broad ``demand side
efficiency'' (DSE) improvements. In fact, NRDC's analysis is
built around the assumption that within seven years, energy
efficiency will replace 11 percent of electricity generation
needs.\8\ However, while the NRDC report does include a call
for EPA to impose mandates on states requiring that such
efficiency gains be quantifiable and independently verified, it
is unclear how NRDC expects states to actually meet these
standards and how energy efficiency standards can be
practically enforceable.
---------------------------------------------------------------------------
\8\ NRDC Report at 44.
The types of efficiency improvements called for by NRDC
that serve as the key component to their overall scheme cannot
be implemented in a manner that makes them practical to use in
a tradable credits system. As NRDC notes, their proposal
depends on efficiency programs that will lower the demand for
[peak] energy through mechanisms ranging from direct load
control of individual customer appliances to programs designed
to create incentives for individual customers to use less
electricity during peak times or select more energy efficient
appliances.\9\
---------------------------------------------------------------------------
\9\ NRDC Report at 35-36.
While the NRDC may believe that practical issues regarding
measurement and attribution of efficiency gains can be
accomplished by regulatory fiat, the reality of electricity
supply, consumer choices, and consumption is much more complex.
This complexity is demonstrated by the various Congressional
efforts to grapple with energy efficiency. Legislation on this
issue has been a top priority for many lawmakers, and multiple
measures to stimulate energy efficiency have been proposed.\10\
Outside analysts, including those inclined to support proposals
similar to the NRDC's, have noted that ``it is difficult to
know whether an efficiency programs is leading to reductions in
energy demand or if, instead demand has slowed due to economic
or other factors.'' \11\ Other analysts have added that ``the
nature of electricity markets and electricity transmission
makes it difficult to link energy efficiency-driven reductions
in electricity demand to avoided generation at a particular
unit'' and that ``while evaluation, measurement, and
verification (EM&V) methods for energy efficiency are well
developed in some contexts, the NRDC proposals pose unique EM&V
challenges.'' \12\
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\10\ Bills introduced in the 113th Congress include: H.R. 83: To
require the Secretary of the Interior to assemble a team of technical,
policy, and financial experts to address the energy needs of the
insular areas of the United States and the Freely Associated States
through the development of action plans aimed at reducing reliance on
imported fossil fuels and increasing use of indigenous clean-energy
resources, and for other purposes; H.R. 115: School Building
Enhancement Act; H.R. 123: Water Advanced Technologies for Efficient
Resource Use Act; H.R. 184: Mechanical Insulation Installation
Incentive Act of 2013; H.R. 400: Clean Energy Technology Manufacturing
and Export Assistance Act; H.R. 472: Federal Cost Reduction Act: H.R.
540: Energy Efficient Government Technology Act; S. 52: Promoting
Efficiency and Savings in Government Act.
\11\ Jonas Monast, Tim Profeta, Brooks Rainey Pearson, and John
Doyle, Regulating Greenhouse Gas Emissions from Existing Sources:
Section 11(d) and State Equivalency, 42 ELR 10206, 10209 (March, 2012).
\12\ Jeremy Tarr, Jonas Monast, & Tim Profeta, Regulating Carbon
Dioxide under Section 111(d) of the Clean Air Act (January, 2013) at
14.
Efficiency gains that cannot satisfy EM&V demands create
dual problems for the NRDC proposal. First, if energy
efficiency gains are improperly measured as the economic
recovery demands more electricity, it will be impossible for
NRDC's assumptions regarding reduced carbon emissions to be
accurate, imperiling all of the alleged benefits from
addressing climate change. Second, if EPA does not believe that
state efficiency programs satisfy EM&V standards, those states
will face the possibility of having their plans rejected and
replaced by a federal plan, setting up a clash between EPA and
the states, which is contrary to the cooperative federalism
structure of the Clean Air Act (CAA). History has shown that
when EPA replaces state plans with federal plans, EPA imposes
even more draconian limits on energy production from
traditional fuel sources, exacerbating concerns about
electricity prices and reliability and making it more difficult
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for those state economies to grow.
Compounding the EM&V problems is the fact that the NRDC
proposal includes no details regarding how states or
electricity generators can structure their policies or
investments in a manner that allows for compliance with overall
emission limitations when that compliance is dependent on
actions completely out of their control, such as reductions in
generation needs by consumers as a result of efficiency
measures. Electricity generators cannot control consumers'
demands or choices for electricity and if those consumers
require electricity that offsets any efficiency gains it is not
clear how generators are expected to comply with the NRDC
proposal. Development of new generation facilities or switching
of fuels is a capital intensive and time-consuming endeavor,
and it is unreasonable and impractical to expect that
electricity generators can rapidly change the nature of their
generation from month to month or year to year based upon the
relative success or failure of the broadly described efficiency
measures discussed in the report.
Implementation of the NRDC plan would also be an economic
straightjacket on states and localities while undermining the
reliability of the US electricity supply. For instance, the
NRDC proposal would lock in GHG emissions at 2008-2010 levels,
which coincided with the deepest points in the Great Recession.
Fortunately, the economic climate is improving, but the
recovery is demonstrating that the 2008-2010 emission levels
cannot be maintained. As the World Resources Institute has
noted, ``The economic slowdown experienced by the United States
and other parts of the world over the period of 2008 to 2012
has lead to decreased demand for goods and services and reduced
energy consumption...This decline is projected to be temporary.
Manufacturing output is expected to accelerate from 2010
through 2020, and emissions are projected to increase by 4
percent over this time.'' \13\
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\13\ World Resources Institute, Can the US Get There From Here?
Using Existing Federal laws and State Action to Reduce Greenhouse Gas
Emissions (2013) at 11.
If the economy continues to recover, states will be forced
with stark choices under the NRDC proposal. States that have an
increase in economic activity, and hence electricity needs,
will be required to actually decrease electricity production at
a time when demand for electricity is increasing. This will
have the effect of increasing electricity prices while
simultaneously driving manufacturing and other energy-intensive
industries out of those states to areas with less stringent
environmental regulations. This result harms both the economy
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and the environment.
This process will also undermine the reliability of the US
electricity supply. Although NRDC attempts to camouflage this
reality, other analysts have noted that their proposal will
inevitably require the retirement of significant portions of
the electricity generating fleet, in part facilitated by low
natural gas prices from increased shale gas development.\14\ Of
course, groups such as NRDC are also working to hamper the
further development of these natural gas resources to achieve
separate environmental goals. Making NRDC's goals a reality
would force the retirement of coal-fired generation and require
it be replaced with other sources of electricity generation.
However, none of these sources have the ability to reliably
replace the 59% of coal-fired units that some supporters of the
NRDC approach want retired.\15\ Put simply, there is no
evidence that any alternatives can replace the staggering 80.2
GW of coal-fired generating capacity that NRDC estimates will
be retired if their proposal is adopted.\16\
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\14\ Robert B. McKinstry, The Clean Air Act: A Suitable Tool for
Addressing the Challenges of Climate Change, 41 ELR 10301, 10308
(April, 2011).
\15\ Id.
\16\ NRDC Report at 45.
The carbon regulatory system suggested by the President and
proposed by NRDC is so broad in scope and vague in details that
the costs of the program for consumers, business, states, and
the federal government are breathtaking. Perhaps this is why
NRDC dedicated less than one page to calculating such costs in
the nearly 90 pages of their report.\17\ Unfortunately,
ignoring the cost of the NRDC proposal will not be an option
and for individuals and state governments on tight budgets.
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\17\ NRDC Report at 29.
It is beyond doubt that that adoption of carbon standards
will increase electricity prices in many areas of the country.
NRDC and others hide this fact in plain sight when they call on
states to lower the demand for electricity by adopting policies
that give state and utility companies the power to control when
individuals and companies can use appliances such as air
conditioners and water heaters and set new electricity rates
that would ``charge more during high-demand hours.'' \18\ Once
again, NRDC is proposing that the government make choices for
consumers, ranging from what appliances and other energy
demanding products to buy, to how they operate and during what
time of the day such products can be used. When one combines
the costs associated with the retirement of existing coal-fired
electricity generation, the conversion of some generating
facilities to natural gas, the administrative costs associated
with developing and implementing the broad array of efficiency
mandates called for by the proposal, and the direct increase in
electricity prices called for by these efficiency polices, it
is clear that the consumers and business will be forced to pay
substantially more for their electricity.
---------------------------------------------------------------------------
\18\ NRDC Report at 36.
Higher electricity prices as a result of policies designed
to limit carbon dioxide emissions would ``ripple through the
economy and result in higher production costs and less spending
on non-energy goods,'' and could lead to ``lower real wage
rates because companies would have higher costs and lower labor
productivity.'' \19\ These costs would have a significant
impact on the manufacturing sector and could threaten to
reverse the momentum of our economic recovery by causing
manufacturing output from energy-intensive sectors to decline
by as much as 15 percent.\20\ Small manufacturing companies
would be hit especially hard.
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\19\ National Association of Manufacturers, Economic Outcomes of a
US Carbon Tax Executive Summary, (2013) at 9.
\20\ Id.
In addition to higher electricity prices, the NRDC proposal
would be extraordinarily costly for states. NRDC makes
absolutely no effort to estimate the administrative costs
associated with their proposal. That is understandable because
it is hard to conceive of another proposal that requires states
to perform a larger array of tasks to try to satisfy EPA
regulators. NRDC's proposal would require that states draft
policies, subject to detailed enforcement and oversight by EPA,
that would regulate every aspect of electricity production and
consumption--from the selection of fuels used in a power plant
to the amount of electricity use by a washing machine in an
individual's home. If EPA finds the policy, or the
implementation of the policy, to be lacking the state would be
required to draft a new policy and dedicate more resources to
EM&V or have EPA force a federal plan on them. In a time of
tight budgets, adding an expansive new regulatory regime on top
of the panoply of existing environmental mandates on states
will require that states dedicate more resources they don't
have to pleasing the EPA. Those resources can only be made
available by cutting basic services to citizens.\21\ For NRDC
to simply ignore these administrative costs on states is an act
of irresponsible fancy.
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\21\ See Will Reisinger, Trent Dougherty, and Nolen Moser,
Environmental Enforcement and the Limits of Cooperative Federalism:
Will Courts Allow Citizen Suits to Pick Up the Slack?, 20 Duke Envtl. L
& Pol'Y F. 1, 21-22 (2010).
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Threats to electric reliability have serious consequences
EPA can ill-afford to risk undermining the availability of
electricity supply in the US, placing electricity reliability
in jeopardy and risking catastrophic economic impacts. Coal-
fired plants cannot be replaced overnight by natural gas
plants, and they certainly cannot quickly be replaced by
alternative energy facilities. The time it takes to install
pipeline and other infrastructure necessary even to begin the
conversion of an old plant or construction of a new one is
considerable. Accordingly, if the EPA forces the retirement of
power plants it will increase the probability of an
insufficient supply of electricity at times when demand peaks,
such as during hot weather, or when there are unexpected
problems with electricity generation or transmission.
EPA should not be developing long-term energy policy
through environmental regulation. The improper regulation of
GHG's could drastically reduce the diversity of this country's
energy sources, particularly by minimizing coal-fired power
generation, and hold the nation hostile to volatile natural gas
prices for the next fifty years. NRDC's proposal is therefore
inconsistent with the administration's ``all-of-the-above''
strategy.
These risks must be taken seriously. As the Institute of
Electrical and Electronics Engineers (IEEE) has stated, ``a
reliable supply of electricity is more than just a convenience,
it is a necessity; the global economy and world's very way of
life depends on it.'' \22\ IEEE further observes that ``Even
minor occurrences in the electric power grid can sometimes lead
to catastrophic `cascading' blackouts. The loss of a single
generator can result in an imbalance between load and
generation, altering many flows in the electricity network.''
\23\ The direct costs to high-technology manufacturing in just
the San Francisco Bay Area during the California blackouts
alone ran as high as one million dollars a minute due to lost
production. The relatively brief Northeast blackout of 2003
cost business about $13 billion in lost productivity.\24\
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\22\ IEEE, Reliability and Blackouts, at http://electripedia.info/
reliability.asp (accessed Nov. 11, 2011).
\23\ Id
\24\ G.F. McClure, Electric Power Transmission Reliability Not
Keeping Pace with Conservation Efforts, Today's Engineer (online) (Feb.
2005).
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Alternative approaches for achieving GHG reductions
When President Barack Obama recently directed EPA to put an
end to ``the limitless dumping of carbon pollution from our
power plants,'' he was obviously relying on hyperbole and not
facts. Mainly because of fuel diversification in power
generation, as well as cleaner burning and more fuel efficient
motor vehicles, CO2 emissions today are lower than they were 20
years ago. Even without new directives and mandates from
Washington, CO2 levels from fixed and mobile sources will
continue to fall. But begging the question of whether America
is already doing more than its fair share to fight global
warming, can we really expect government agencies, such as the
EPA, to regulate the economy towards a carbon-free future?
Assuming no pushback from Congress and industry, in theory
the EPA could move us toward a carbon-free economy that is the
ultimate goal of the environmental community. But at what cost
in terms of lost jobs, higher energy prices, and limited
consumer choice?
The EPA is not the best way to attack climate change.
Though federal law requires agencies like the EPA to calculate
the costs and benefits of its proposed rules, politics, often
trumps economics when preparing these studies. For example, the
purported ``social costs'' of carbon may be included in cost-
benefit calculations to either support new EPA restrictions on
power plant emissions or to make the case against a project
like Keystone XL. Given the Administration's recent move to
quietly increase the so-called social cost of carbon from $21
to $35 per metric ton, we can expect future regulations to be
more costly since the estimated benefits will be artificially
higher.
The only effective way to significantly reduce global GHG
emissions is through a coordinated strategy involving all of
the planet's major economies. Otherwise, any marginal
reductions in America as a result of the president's proposals
will be more than offset by rising emissions in China, India,
Brazil, and other fast-growing economies around the world.
Still, there is much we can do at home. In particular,
investing in natural gas and nuclear power can be much more
effective approaches for diversifying our base-load portfolios
and thereby reducing CO2 emissions than the regulatory regime
proposed by the President and by the NRDC. As a result of
market economics, clean natural gas now accounts for 30 percent
of power generation compared with 20 percent five years ago.
With supplies projected to remain abundant and prices
competitive for the foreseeable future, gas may eventually
surpass coal as the nation's primary fuel for utilities and
manufacturers. What's more, if instead of wasting billions of
taxpayer dollars on electric vehicles, government and industry
partnered to develop the infrastructure to support better
transmission of natural gas and even natural-gas fueled
vehicles, carbon emissions would be further reduced.
Regrettably, in his proposed climate plan, President Obama
omitted an initiative that could have a greater impact on
reducing GHGs globally than any future EPA regulations with no
cost to taxpayers--accelerating American exports of liquefied
natural gas. The world is hungry for clean natural gas,
especially for use in electric power generation. With gas
prices averaging $12 in Europe and $15 in Asia, US gas at $ is
a bargain, even when processing and transportation costs are
included.
We also need to encourage a nuclear revival in America.
Though the US has 104 nuclear plants operating in 31 states, no
new facilities have been ordered since the 1970s. Still, those
plants currently generate about one-fifth of the nation's
electricity while emitting no greenhouse gases. Investing in
new nuclear power plants will be good for the economy, good for
the environment, and good for energy security.
*****
Addressing global climate change is no easy task. However,
the command and control regulations suggested by the President
and his environmentalist supporters miss important
opportunities, harm households and small businesses by
increasing electricity prices, and will do little to address
actual environmental challenges.
Thank you for the opportunity to testify, and I am happy to
answer your questions.
Testimony of Paul Gardner
Business Development for Agilis Group, Inc.
Before the House Committee on Small Business
Subcommittee on Agriculture, Energy and Trade
Hearing on: Climate Action Plan and Impact on Small Business
Thank you Chairman Tipton and Ranking Member Murphy for
allowing me the opportunity to testify before your subcommittee
regarding President Obama's Climate Action Plan and its impact
on Small Business.
My name is Paul Gardner, and I am currently the head of
Business Development for Agilis Group. I have spent 25 years in
the aerospace industry with a particular focus on the research
and development of advanced turbine engines for both flight and
power generation applications. I have been with Agilis for the
past 16 years.
Agilis is a 20 year old professional engineering services
company focused on the technical research and engineering
development of turbine engines. Agilis is a Small Business with
approximately 130 full time employees, mostly degreed
engineers, based in Palm Beach Gardens, Florida. We also have
an engineering office in Camden, South Carolina. We currently
provide advanced research and development engineering to the
turbine original equipment manufacturers in the industrial
power generation, oil and gas, military flight, and commercial
flight industries.
Since I have been at Agilis, we have developed business
relationships and won contracts to support several key clean
energy initiatives, including the research and development of
high efficiency natural gas engines, clean coal combustion, CO2
sequestration systems, fuel burn reduction and increased fuel
efficiency for Air Force and Navy aircraft propulsion systems,
turbine power generation from advanced small modular nuclear
reactors, catalytic and low-emissions combustion systems,
advanced wind turbine gear systems, and turbine power
generation from advanced fuel cell systems.
Our business contracts and engineering projects primarily
come from private industry. Only a very small percentage of our
work comes directly from government agencies and direct
government contracts. Agilis wins contracts from the turbine
engine companies and provides sub-supplier support to the
government contracts these companies have received from the
DOE, DOD, NASA and other agencies. Currently, about 40% of our
engineering business is as a sub-supplier for government
contracts. The other 60% comes from the turbine engine
companies' internally funded development efforts.
At Agilis, we believe that the President's Climate Action
Plan will have a definite impact on our business. I would like
to explain some details of the work we have performed to
illustrate how funding of clean energy initiatives,
specifically the research and engineering development of clean
energy technologies, can provide direct support to Small
Businesses like Agilis.
In 2002 and 2003, Agilis provided sub-supplier support to a
DOE contract to convert the waste coal dust from a coal fired
power plant in Alabama into electricity. The original plant
design collected the residual coal dust from the coal fired
boiler, compressed and packaged it into transportable blocks
and shipped it off to be stored as toxic waste. In support of
the DOE contract, Agilis performed the combustion research,
engineering design and development of a turbine combustion
system that burns the residual coal dust as a fuel for a small
industrial gas turbine. The turbine engine now produces enough
direct electric power from the coal dust to operate the entire
facility.
In 2009, Agilis provided sub-supplier support to a DOE
contract to convert the waste heat from a fuel cell system into
additional electricity. The fuel cell system used natural gas
as a fuel source, but produced a large quantity of residual
heat as the fuel cell converted the fuel into electricity.
Agilis performed the system design and engineering development
of a turbine system that converts the excess heat into work
that powers an additional electric motor. The overall
efficiency and power output of the fuel cell facility design
was increased by 20%.
Since 2009, Agilis has provided sub-supplier support to DOD
contracts directly focused on the technical research and
engineering development of the next generation fuel efficient
turbine engines. These DOD programs include the Navy's Task
Force Energy and the Air Force's VAATE (Versatile Affordable
Advanced Turbine Engine) initiatives. These programs are
directly aligned with the DOD Operational Energy Strategy
Implementation Plan, released in March 2012, with a key goal
factor to increase fuel efficiency and reduce reliance on
foreign oil supply. Since 2009, Agilis has received more than
$5M in engineering contracts from the turbine engine companies
to support these programs.
Agilis has provided over $5M of engineering effort in
support of a DOE program to develop advanced compression
systems used in the capture and sequestration of CO2. This
effort is in direct support of the President's plan to ``cost
effectively meet financial and policy goals, including the
avoidance, reduction, or sequestration of anthropogenic
emissions of greenhouse gases''.
Agilis has provided over $10M of engineering support to
develop and implement advanced catalytic combustion and low
emissions systems that have achieved new industry levels for
emissions reduction.
Agilis has also supported development of turbine engine
designs for advanced helium cooled small modular nuclear
reactors powered by stored nuclear waste material. Our
customer's published research suggests that there is enough
degraded nuclear waste stored in the United States today to
fully meet our domestic energy needs once this technology has
been fully developed and implemented. If additional DOE and
customer internal funding is made available to continue this
development, Agilis and other Small Businesses will directly
benefit.
Many of these clean energy technologies and energy
efficiency programs are ongoing development efforts that will
provide future contracts and work for Agilis. Agilis does not
receive these projects directly from government agencies. We
receive our business contracts and engineering projects from
the turbine engine companies. However, the majority of these
programs have been driven by specific government initiatives
that are aligned with the needs and goals of private industry.
In support of these programs, Agilis has been able to grow and
hire 23 full-time engineers in 2013 of which 15 have been
recent college graduates. These clean energy initiatives create
high paying jobs for Small Businesses.
As we try to understand the implications of the Climate
Action Plan and its impact on Small Business, we believe there
are several related topics and issues that must be addressed by
this Committee for the Climate Action Plan to have a positive
impact. These topics include stronger encouragement for prime
government contractors to flow work to Small Businesses,
keeping high-skilled, high value engineering jobs on-shore,
meaningful tax incentives for Small Businesses to grow, control
on the insurance cost burdens that Small Businesses bear, and
consistency in funding subsidies and government research and
development initiatives. Small Businesses are often the first
impacted when budgets are in doubt. Small Businesses struggle
to find the financial stability to weather through the
uncertainties of funding delays, sequestrations and continuing
resolutions.
Mr. Chairman and Ranking Member, thank you again for
allowing me the opportunity to testify today before this
subcommittee on behalf of Agilis. I hope I have help you
further understand how the Climate Action Plan could impact
Small Business.
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I. Introduction
Chairman Tipton, Ranking Member Murphy, and Members of the
Subcommittee, thank you for giving the Ad Hoc Coalition of
Small Business Refiners the opportunity to testify for the
record for the hearing entitled ``The President's Climate
Action Plan: What is the Impact on Small Business?'' As
Congress proceeds with legislative considerations, our group
believes it is important for Congress to know about the
companies that will be impacted by the President's Climate
Action Plan.
Small Business Refiners (SBRs) are located across the
country from Pennsylvania to the West Coast. We vary greatly in
operational configuration, product slate, marketing area, crude
slate, and capacity. We have worked together for many years in
an ad hoc coalition which has enabled us to share views,
exchange relevant information and work cooperatively on issues
of importance, often of survival. Small Business Refiner
flexibilities included in EPA rulemakings and other compliance
requirements are particularly important to the continued
viability of the small business refiner segment of the
industry.
Background on the Ad Hoc Coalition of Small Business
Refiners
SBRs occupy a unique place in the economy and the energy
sector. We have long been recognized by the U.S. Congress,
Department of Energy, the EPA, the Small Business
Administration, Department of Defense and other agencies as
critical in providing supply and competition that benefits
consumers and the nation. Clearly, SBRs have important
financial differences from large refiners. It is a well-settled
fact that our size limits the options we have to comply
economically with new regulations.
Small Business Refiners are important to the economy
Small refiners foster competition in the
petroleum industry.
Small refiners are critical to easing the
tight supply of petroleum products and often are the
only sources of supply in their areas.
Most small refiners serve as the major
economic resource in the small, often rural,
communities in which they operate.
It is generally agreed that the economic
``multiplier effect'' (jobs and other local and
regional investment and businesses) resulting from
refinery operations is eight-to-ten times the
refinery's actual budget.
Many small refiners provide a reliable and
competitive supply of military jet fuel to our
country's military bases and thus are important to
national security.
Small Business Refiners Do Not Enjoy Economies of Scale
Small refiners are not able to spread
compliance and operating costs over much greater
product sales and over a much greater asset base.
SBRs are not fully integrated and many do
not have upstream crude oil and gas production,
midstream pipelines and terminals, or downstream retail
marketing.
SBRs as a group are most vulnerable to
decreasing domestic demand for refined products and
increased competition from renewable fuels.
Small Business Refiners Have Limited Resources and
Compliance Flexibility
Access to capital present great obstacles
for SBRs.
Small refiners do not have large staffs with
a diverse range of specialties and in-house expertise
to negotiate and implement permitting, regulatory, and
compliance requirements.
Qualified outside engineering consulting is
limited even where financial resources to procure such
help are available. Due to the smaller size of
projects, SBRs are disadvantaged when competing with
large refiners to garner outside engineering resources.
The majority of SBRs do not have port access
and are therefore more reliant upon local domestic
crude supplies; they therefore have little or limited
ability to change crude slate when regulations and
specification change.
The majority of SBRs are not
organizationally complex and thus have less operational
flexibility and fewer outlets for intermediate
products.
Small refiners owning just one or two
facilities have limited internal compliance flexibility
relative to the industry at large with respect to
Average, Banking, and Trading (ABT) programs. ABT
programs, which are a fundamental aspect of many EPA
fuel regulations, inherently provide more flexibility
to companies owning multiple refineries than SBRs owing
a single or few facilities.
All Small Business Refiners compete in a highly competitive
global commodity market where imported products from foreign
competition influence refining margins and economics. Unlike
large, fully integrated oil companies, we only operate between
two commodity markets: 1) the oil market; and 2) the gasoline
market. We must purchase crude oil that is priced in the global
market and refine it. We then sell our products into the
gasoline market, which is a very sensitive, volatile market.
Between these two markets, SBRs are able to stay in business
based on how well we control our costs compared to other fuel
suppliers.
Regulations and mandates increase operating costs, which in
turn negatively impact Small Business Refiners' ability to
manage costs between the oil market and the gasoline market.
This impact affects all refiners, especially Small Business
Refiners. When a refiner cannot pass on or absorb these costs
they go out of business. The result is reduced domestic
refining capacity and higher gasoline costs for the consumer.
The following sections explain how current, proposed and
potential future GHG regulations drive up our costs. These
regulations when added to other regulations that affect our
industry show the cumulative burden place on our sector of the
industry. These higher costs are either passed on to the
consumer in the form of increased gasoline or diesel prices, or
the refinery goes out of business when the costs exceed the
capitol reserves or credit of the refinery; in the case of a
Small Business Refiner, reserve capital and credit are
insufficient and do not provide a long term solution.
In addition, several regulations have conflicting
consequences, so our industry ends up in between the proverbial
rock and a hard place. Regulatory development must be
coordinated and use a holistic approach to ensure cumulative
costs are taken into account and unintended consequences are
mitigated.
II. GHG Reporting Rule
In October 2009, the EPA issued the final Mandatory
Reporting of Greenhouse Gas rule, which required facilities
that emit greater than 25,000 metric tons of GHG's to submit
annual reports to the EPA. During the months leading up to the
final rule, the ad-hoc group of SBRs commented on the proposed
rule. Here we would like to highlight two of those comment
areas; specifically, 1) compliance cost and 2) de minimis
emissions.
1. Compliance Cost: From our perspective, the EPA is
ineffectively examining the actual cost of compliance.
In the proposed rule, EPA estimated that the cost of
compliance with the GHG reporting rule was small, and
therefore did not have a significant impact on
businesses, including SBRs. For example, the EPA's cost
estimate for installation of Continuous Emission
Monitoring Systems (CEMS) was $9,500 per refinery. With
this presumed minimum impact, the EPA did not establish
a Small Business Regulatory Enforcement and Fairness
Act (SBREFA) process to investigate the negative
impacts on small refiners and determine flexibility
options. One SBA's actual cost to install the required
CEMS was $450,000--47 times more expensive than the
EPA's estimate. First year set-up and compliance cost
exceeded $750,000. Over the next ten years, the cost to
comply with this rule alone will exceed $4 million for
one single SBR.
2. De Minimus Emissions: According to 2010 data
published by the EPA, the entire refining industry
represents only 5.7% of the 3.2 billion metric tons of
reported stationary sources GHGs. One SBR's total of
199,913 metric tons represents 0.00625% of the total
reported GHG emissions. Not only does the refining
industry contribute a small percent to the economy's
overall GHG emissions, but a single SBR's contribution
is infinitesimal. Combined, SBRs only represent about
15% of the industry which translates to less than 1% of
total GHG emissions. Any rational regulatory approach
would recognize an SBR's GHG emissions as de minimis.
However, SBRs are subject to this regulatory burden,
and in fact, it increased our operating cost
disproportionately to the overall impact that our
refinery has to global GHG emissions. This rule, and
its consequences, are not isolated in their affect, and
in fact, interact with other Rules to create even
larger negative consequences.
III. GHG Tailoring Rule
In May 2010, EPA issued its final rule addressing GHG
emissions from stationary sources under the Clean Air Act (CAA)
permitting programs. This final rule sets thresholds for GHG
emissions that define when permits under the New Source Review
Prevention of Significant Deterioration (PSD) and Title V
Operating Permit programs are required for new and existing
industrial facilities. Under the tailoring rule, existing
facilities with carbon dioxide emissions exceeding 100,000
metric ton per year are required to obtain an updated operating
permit. In addition, facilities that would implement
modifications increasing carbon dioxide emissions by 75,000
metric tons per year would require a PSD permit. Both
thresholds were set to limit the number of GHG permits that
would be required throughout the national economy. Because most
SBR's GHG emissions exceed 100,000 metric tons per year, we
will need to update our Title V permits for current operations.
However, due to our small size, any modifications we make would
most likely have emissions less than 75,000 metric tons, and
therefore, not require a GHG PSD permit. To illustrate this
point, a small facility like CountryMark's 27,000 barrel per
day refinery has process heaters and boilers that average
approximately 30 MMBTU/Hr. This results in approximately 15,000
metric tons per year of GHG emissions. This is well below the
75,000 metric ton threshold set by the GHG tailoring rule.
Therefore, in the current environment, CountryMark would be
able to replace obsolete equipment such as 1950's vintage
boilers without the requirements and costs of a PSD permit.
All SBRs are or are preparing to operate under the current
tailoring rule. However, decreasing the tailoring rule limits
would put significant regulatory pressure on SBRs, especially
with regards to replacement of obsolete equipment or making
improvements. Without the ability to upgrade, SBRs will
eventually not be able to operate and potentially go out of
business. The EPA has not indicated significant upcoming
changes to the tailoring rule limits at this time. However, of
great concern is that EPA has indicated they intend to further
restrict GHG emissions for the refining sector applying another
concept called New Source Performance Standards.
IV. New Source Performance Standards (NSPS)
Several of the undersigned participated as a Small Entity
Representative (SER) on Small Business Advocacy Review (SBAR)
panels for both the Tier 3 Fuels and the ``Petroleum Refinery
Sector Risk and Technology Review and New Source Performance
Standard (NSPS)'' proposed rule makings. Meetings were held for
both panels on June 28, 2011 and August 18, 2011. The SERs are
on record stating the information provided as part of the
``Petroleum Refinery Sector Risk and Technology Review and New
Source Performance Standard (NSPS)'' was inadequate for the
purpose of providing flexibility options to the EPA from the
SERs.
At the SBAR panel meetings, the EPA articulated how they
intended to further control GHG emissions only in refineries,
below the tailoring rule limits that apply to the general
economy. SERs were able to evaluate the impact of the EPA's
intentions to lower the GHG limits below those stipulated in
the tailoring rule. By uniquely regulating GHG emissions from
only the U.S. refining sector, the EPA directly threatens small
refineries since we lack the ability to pay for costly and
arbitrary regulations.
Unlike the tailoring rule, meeting NSPS requirements may
involve implementation of Best Available Control Technology
(BACT). BACT is usually applied to larger sources, because
economic considerations are part of the determination. For
smaller facilities, BACT implementation is typically
uneconomical, because the size of the equipment and de minimis
emissions cannot justify the cost. For example, at large
refineries with fired process heaters that burn 100's of
millions of BTUs an hour, BACT equipment includes expensive air
pre-heat equipment. In these situations, this makes economic
sense because it optimizes energy input costs. At a small
refinery, the smaller sized process heaters are natural draft
design and do not have air pre-heat. For small process heaters,
requiring air pre-heat could add more that 50% to the cost of
the new equipment. The additional cost of installing BACT
equipment at a small refinery would not provide a commensurate
energy savings.
If the EPA uses the NSPS rulemaking to drive GHG limits to
statutory limits of 100 and 250 metric tons, it would be orders
of magnitude more stringent than the tailoring rule. Since most
SBRs are sensitive to capital costs, the additional increase
required to meet the stricter limits would make most
modifications uneconomical, limiting or precluding growth at
the refinery.
The EPA also told the SERs they were considering energy
management and intensity benchmarking as additional ways to
further reduce GHG emissions through the proposed NSPS
rulemaking. In addition, the EPA discussed leak detection
programs and benzene reduction could also be targeted in new
regulation. There are significant problems with these
prescriptive approaches to reducing GHG emissions.
1. Energy Management: Energy costs are a very high
expense item in a refinery. Economic realities for
refineries have already forced operators to undertake
energy management programs in order to optimize and
reduce energy costs which have already lowered GHG
emissions. In 2007, one SBR implemented an energy
program where the primary energy savings were achieved
from tuning and optimizing excess air in heaters and
boilers. Significant investment was made for program
implementation, including shared savings in energy
reduction. EPA discussed prescriptive requirements for
meeting stringent energy management goals. EPA's type
of approach would increase compliance costs due to
reporting requirements alone. Prescriptive EPA rules do
not allow for innovation and consistently cost more to
implement than EPA estimates. Any energy management
program should be performance-based and flexible enough
to allow existing programs to meet compliance
objectives.
2. Intensity Benchmarking: Intensity benchmarking
would compare every refinery to the same standard
developed by the EPA. The problem with EPA setting
standards is that no two refineries have the same
capacity, complexity and feed stock. Based on past
experience with benchmarking programs, the impacts on
small refineries are inadequately understood by the
EPA's approach. Small refineries do not have the
economies of scale. Even on a process by process basis,
small facilities have limited opportunities for heat
integration. Also, while a large facility has more
power demand, their scale provides opportunities for
co-generation facilities which also improve
efficiency--this is not true in a small facility.
Benchmarking has to account for complexity of
processing units and power generation. Physical
equipment size should be taken into account. Treating
small refineries and larger complexes the same is like
comparing apples to oranges. A prescriptive approach to
benchmarking has the potential to inadvertently drive
small business refiners out of business, due to
disproportional economic impacts of ignoring facility
size in the equation.
3. Leak Detection and Repair (LDAR): Many SBRs have
significant resources invested in their LDAR program.
Existing programs include thousands of monitoring
points. Adding the fuel gas system to the leak
detection program would increase monitoring points by
over 50%. Since many SBRs are located in rural areas,
they are hundreds of miles away from the nearest large
refinery or refining complex. This provides little
opportunity to use the same reputable contractors at a
competitive cost. Therefore, our costs are
disproportionately greater. Initial estimates by one
SBR show that the cost of the current program would
increase by a minimum of $500,000 per year due to
increased monitoring requirements.
4. Total Annual Benzene (TAB): Changing the
wastewater amendment to require controls for less than
10 Mg Total Annual Benzene-in-waste (TAB) would require
significant capital for many SBRs. Based on the
estimates provided by the EPA, this could be in the
millions. Definitive estimates could not be developed
at this time because the proposed Benzene floor is not
known. The Benzene requirement appears to be driven by
the EPA risk review dealing with cancer and non-cancer
risks from refineries but could be related to reducing
VOC or GHG emissions. Regardless of the driver, this
low limit would not exceed a risk related threshold nor
should be considered as a potential GHG reduction.
In the end, it appears that EPA is headed toward further
restricting GHG emissions from refineries even though the
tailoring rule as it now stands would not require dramatic
changes for small refiners. A one-size-fits-all approach is
clearly inappropriate and, if true, would further damage SBR's
ability to stay in business. EPA's approach outlined in the
SBAR panel meetings presents uncertainty as to how the EPA will
further reduce the threshold for GHG permits requiring BACT.
Implementing BACT for small sources would have diminishing
returns since the cost would be high but the incremental
reduction would be very small. EPA even admitted in the SBAR
panel meetings that reductions from refinery process heaters
and boilers would only be in the 1-3% range. With the entire
refining industry only contributing 5.7% of GHG emissions,
stringent requirements for process heaters would only reduce
national GHG emissions by 0.17%. This begs the question as to
why require additional expense, which will threaten our
existence, for minimal returns?
V. Conflicting Requirements
EPA's Clean Air Highway Diesel rule and Non-road Diesel
rule requires that only 15 parts per million (ppm) of sulfur
diesel fuel be sold on and off-road. To achieve compliance with
this requirement and continue to stay in business, SBRs were
required to construct and start-up Distillate Hydrotreating
Technology. One SBR completed this project which included
construction of sulfur recovery facilities for a total cost of
approximately $50 million. The annual operating cost for this
complex is $4.4 million.
EPA's Tier 2 Gasoline rules required that gasoline sulfer
be reduced to 30 ppm. To comply, SBRs constructed additional
sulfur removal capacity for gasoline in order to continue to
sell product and stay in business. For one SBR, this project
cost $33 million and has an annual operating cost of $1.8
million per year.
Now The EPA has proposed Tier 3 gasoline regulations that
would further reduce sulfer in gasoline from 30 ppm to 10 ppm.
One SBR has estimated that complying with this additional
requirement has potential capital costs of $15 million and
increased operating costs of over $200,000 per year.
Removing sulfur from diesel fuel and gasoline takes
hydrogen and energy, which in turn, significantly increases GHG
emissions. Prior to installing desulfurization capabilities,
some SBRs purchased minimal amounts of natural gas for
combustion. Instead, excess hydrogen produced by reforming was
burned in process heaters resulting in minor GHG emissions.
This hydrogen is now required to remove sulfer from diesel fuel
and gasoline. Many SBRs now purchase natural gas for combustion
in process heaters and to produce hydrogen needed for removing
sulfur. Hydrogen is produced by reforming natural gas which
essentially strips away hydrogen from the molecule and
discharges carbon as carbon dioxide--a GHG. In addition,
desulfurization takes energy which requires additional process
heaters and increased steam production. Therefore, the energy
intensity of the refinery has increased, due to additional
fired sources. These effects combined have increased GHG
emissions at some small refineries by 10-15%.
One SBR spent or will spend nearly $100 million over a ten
year period to comply with EPA's low sulfur fuel requirements
just to stay in business. These changes have increased GHG
emissions. Now with GHG reductions looming on the horizon, SBRs
will be penalized through GHG regulation for complying with
other EPA requirements. Even with the increased GHG emission
due to removing sulfur from fuels, SBRs still only contribute
an infinitesimal fraction to the nation's GHG emissions.
VI. Renewable Fuels Standard
The decision to blend renewable fuels should be driven by
customer demand and economics. The marketplace was working to
drive the use of these fuels. The Renewable Fuels Standard
(RFS) changed the natural progression of these fuels by
mandating that obligated parties either purchase and blend
ethanol and biodiesel or purchase Renewable Identification
Number (RIN) credits. This flawed regulatory regime was
partially driven by reducing GHG emissions. Even though there
are four distinct categories of renewable fuels required,
ethanol and biodiesel are the only products in commercial
volumes that can be used to comply with this complicated rule.
Cellulosic biofuels are not commercially available; therefore,
obligated parties are required to purchase cellulosic waiver
credits from the EPA for compliance.
Many SBRs became obligated party under the RFS in 2011.
Thirteen small business refiners were granted an additional 2-
year extension for compliance based on economic hardship due to
the RFS. As an obligated party, an SBR can calculate the cost
of compliance by using the current RIN credit pricing and
estimated annual standard requirements. RIN prices are at
record high levels. Under the current rule and pricing, one SBR
estimated compliance costs of $50 million in 2013 which
increases to $94 million in 2022. The average cost of
compliance for this period is $70 million per year. Even though
some SBRs received hardship exemptions, since these costs
increase over time, the hardship will only increase. As of
today, we predict these costs will eventually drive some SBRs
out of business.
VII. Cap and Trade
In addition to those issues outlined in previous sections,
the specter of implementing potential limits on GHG emissions
through a cap and trade regime is still within EPA's power. A
GHG regulatory regime of the variety discussed in Congress in
2009 would be devastating to all SBRs. The first year
compliance costs could exceed annual income, as was the case
with some prior legislative proposals. SBRs would not be able
to absorb the high compliance costs and remain economically
viable. Therefore, the industry would need to pass those
additional costs on to consumer in the market or go out of
business.
VIII. Summary
In summary, the cumulative effect of current and proposal
EPA regulations as estimated has significant current and future
financial impact on SBRs. Figure 1 provides the cumulative
impact of increased operating costs (left vertical axis) and
their potential impact on clean fuels (gasoline and diesel)
prices to the consumer (right vertical axis). The data provided
in Figure 1 is based on actual cost provided by one SBR. The
annual operating cost includes a capital recovery factor which
over time extinguishes when the capital is recovered. However,
the timing of current and proposed regulations overlap each
other resulting in cumulative increases in cost when viewed in
total. This is not to say that all of these costs will be
passed to the consumer in every area. Fully integrated oil
companies or larger refiners may be able to absorb these
incremental costs and continue to maintain profitability.
However, for Small Business Refiners these increases cannot be
absorbed, they must be recovered. If the market does not bear
the additional costs with high prices, eventually marginal
refiners will go out of business. Jobs are then lost and
gasoline and diesel prices go up. Refinery shutdowns due to
lack of profitability are not new to our industry--117 refiners
(nearly half the industry) have shutdown since 1982 according
to the Energy Information Agency.
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IX. Conclusion
SBRs operate in a highly competitive commodity market,
where oil prices and refining margins are influence by global
events beyond our control. Regulation and mandates increase
capital requirements, operating costs and product costs, which
in turn, make refiners, especially Small Business Refiners,
less competitive. When refiners cannot pass on these costs to
the consumer, or absorb these costs, they go out of business.
The result is reduced domestic refining capacity and
consequentially higher gasoline and diesel costs for the
consumer. If domestic refining capacity is reduced, EPA
regulations will actually increase U.S. demand for imported
fuels and consumer prices will increase.
Currently, EPA reviews and analyzes each regulation
separately to determine the impacts on the industry. The
current regulatory regime forces our industry to comply with a
new rulemaking seemingly about every year or two. The new rules
keep coming regardless of environmental improvements that have
been made. New rules that pile onto existing rules appear to be
proposed before adequate time to determine the benefits of a
current rule has occurred.
Regulation of GHG poses a significant threat to all
refiners and especially small business refiners. The refining
industry as a whole only contributes 5.7% of the nation's GHG
emissions reported from stationary sources. The EPA admits that
regulating the refining industry will only lower GHG emissions
by 1-3%. For the example, let's assume that refinery GHG
emissions could be reduced by 5%. According to published
reports, the United States contributes approximately 18% of
global GHG emissions. Doing the math, regulating GHG for
refineries has the potential to reduce (5.7% x 5% x 18% =)
0.00051% of global GHG emissions. The potential cost of
compliance is high for very small impacts on global GHG.
Industry must analyze every aspect of the business
including regulation in total. It is critical to understand
what the cumulative effects of regulations and mandates are on
the business and the timeline over which they will occur.
Capital and expense that is spent on regulatory compliance
cannot be spent on growth opportunities that lead to higher
employment. If these costs cannot be absorbed or passed on to
the consumer, refiners will shut down. Either way, costs will
increase in the long term as refining capacity is rationalized.
The following SBRs endorse this testimony and would welcome
participating in the legislative process that would stop or
limit EPA's ability to regulate GHG emissions from the refinery
industry and especially small business refiners.
Respectfully submitted:
Countrymark Cooperative Holding Corporation, Indianapolis,
IN and Mt. Vernon, IN
Petro Star, Inc., Anchorage, AK
Placid Refining Company, LLC Dallas, TX and Port Allen, LA
Wyoming Refining Co. Denver, CO and New Castle, WY
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