We believe there is substantial opportunity for economic results in this way, and we hope our offset programs will prove to be a pilot in this regard.

An area that is often mentioned and one which we must take a more negative view of is the inclusion of weighting factors for environmental externalities in utility least cost planning. We find that this method tends to be extremely arbitrary both in the numbers that are used and in its application solely to electric utilities and not to our competitors. More than that, the use of externalities tends to create situations where only natural gas is permitted as a fuel, and we believe that, for reasons of cost control and a whole variety of others, there must remain a role for coal in our energy supply.

As we look from our small perspective on efforts to deal with these issues on an international basis, we tend to believe that the United States should encourage more decisive international action, that it should not move in advance of such action, but when it can do so, it should be developing and strongly supporting verifiable international plans.

One of the things which concerns us greatly is that those societies which have somewhat more flexible and less rule- and standard-based ways of proceeding may adopt very fine sounding objectives but not, in fact, adopt the mechanisms to achieve those objectives. We believe that the United States should move in tandem with others to make certain that we are all moving together.

In this context, I am going to commit what I understand to be a sin and use the "t" word. I have spent a great deal of time looking at different ways of inducing change in behavior when the amount of change which is required is unclear and the affordability of that change is also unclear.

In that context, I would submit to the committee that a combination of modest but very broad based greenhouse gas taxes, coupled with the potential to remove those taxes through the purchase of offsets where those are cheaper, will be a more efficient and less intrusive way of bringing about action on the greenhouse front than many others.

As one who finds in management that the spirit of continuous improvement is necessary to almost everything we do, I am often troubled when trying to deal with governmental issues in which the options seem to be to do nothing or to do the biggest and most pervasive thing that one can think of.

In that context, Mr. Chairman, I certainly approve of your earlier remarks, strongly endorse them, and would suggest that bringing a continuous improvement attitude to the greenhouse gas area offers great promise. I hope that offsets can be the way of doing it, but certainly I would contend that carbon taxes at a modest level would be far more fair and far more effective than some of the kind of externality rules being adopted in utility proceedings.

Finally, let me say we continue to support the elimination of income taxes on consumer recipients of conservation measures, and, as usual, we believe the best way to get industries like ours to go out ahead of the law is to create regulatory structures where we can make a little more money by doing a better job.

I thank you for letting me address you and hope you find our experiences of some use.

[Testimony resumes on p. 158.]

[The prepared statement of Mr. Rowe and responses to subcommittee questions follow:]

TESTIMONY OF

JOHN W. ROWE

PRESIDENT AND CHIEF EXECUTIVE OFFICER

NEW ENGLAND ELECTRIC SYSTEM

Good morning Mr. Chairman and distinguished members. I appreciate the opportunity to discuss the steps that our Companies are taking to reduce greenhouse gas emissions and other air contaminants.

Overview of New England Electric System

1

New England Electric System is a registered public utility holding company. Our retail subsidiaries serve almost 1,300,000 customers or 2,700,000 people in most of Rhode Island, a substantial part of Massachusetts, and smaller parts of New Hampshire. Approximately two-thirds of the energy that supplies our customers comes from fossil-fuel.2 Since coal is a significant factor in maintaining our costs in the lower third of utilities in New England, we have serious interest in global climate issues and greenhouse gas emissions.

NEESPLAN 3

During 1990 we reevaluated our System's basic mission as part of our quality improvement process. We determined that reducing environmental impacts ranked along with improving service and managing costs as three continuing imperatives. In essence, we believe that long run business success requires us to meet the expanding electric needs of our customers while continuously reducing environmental impacts.

In order to implement this application of continuous improvement philosophy to environmental issues, in November 1991, we launched NEESPLAN 3, which set three major goals for the 1990's:*

Goal No. 1 is to continuously reduce the environmental impact

of our electric service by:

Reducing weighted net air emissions (including

greenhouse gases) by an estimated 45%

Continuing the nation's leading energy

conservation program, and

Purchasing renewable energy and emissions
offsets.

Goal No. 2 is to maintain overall rate increases at or below inflation for the balance of the decade, and to keep our rates the lowest among the major utilities in the three states we serve.5

Goal No. 3 is to strengthen the diversity of the energy sources that serve our customers, through the competitive marketplace. This will be done by bringing more non-utility generation into service and by increasing the use of natural gas as a generating fuel at our existing generating stations.

The Environmental Collaborative

To help New England Electric develop and implement strategies to meet our new environmental goal, we have formed an Environmental Collaborative. The Collaborative includes representatives from the environmental, consumer, business and academic communities. Similar to an advisory group that helped us develop our conservation programs, we believe that the new Environmental Collaborative will help us to move forward on the NEESPLAN 3 environmental goal. The Collaborative will specifically help us to develop the details of initiatives to use renewable resources and emissions offsets.

The Air Emissions Reduction Goal

- 3

As I mentioned previously, the key environmental goal in NEESPLAN 3 is to reduce weighted net air emissions, including greenhouse gases, by an estimated 45% over the decade. The reduction reflects a weighing of various types of air emissions.' We take into account emissions from all sources of energy that we deliver to our customers, including energy from non-utility generators. The net emissions include the estimated effect of emissions offsets, which I will discuss in a few moments. This net air emissions reduction will be achieved despite the fact that the electricity requirements of our customers are projected to increase by 14% over the decade. On a per kilowatthour basis, the net emissions reduction would be more than 50%.

The major contributors to the net emissions tonnage reduction are:

Sulfur Dioxide - a 53% tonnage reduction, representing a
reduction of about 74,000 tons per year.

Nitrogen Oxides - a 50% tonnage reduction, representing a
reduction of about 30,000 tons per year.

Carbon Dioxide - a 20% reduction, representing a reduction of about 3.000.000 tons per year. This includes the effects of emissions offsets, and includes all greenhouse gases.

New England Electric plans to achieve this ambitious overall air emissions reduction goal through a variety of programs.

11% improvement will come from actions to comply with Federal and State clean air legislation, ahead of schedule where feasible. For example, as a step towards meeting the

Massachusetts and Federal acid rain laws, we have just