established should be just and reason- Granting exemptions from the Fuel Use Act for new cogeneration facilities only where there is a showing of net oil/gas savings. EEI believes that these legislative and regulatory initiatives will assist the nation to more rapidly achieve its goal of energy independence. Mr. OTTINGER. Thank you. That raises questions. But let us see if we cannot get those out from our other witnesses. Let us hear next from Mr. William Nicholson. STATEMENT OF WILLIAM J. NICHOLSON Mr. NICHOLSON. Thank you, sir. I am here, appearing here today on behalf of the American Paper Institute. I am here with Rigdon H. Boykin, who is the attorney for the American Paper Institute. I would like to request the opportunity to review the transcript at the end to insure the accuracy of my statements. The American Paper Institute opposes the adoption of H.R. 2876 and H.R. 2992. The development of the Nation's cogeneration and small power production potential contemplated by PURPA is now moving forward. To further encourage utilities to engage in cogeneration and small power production by eliminating restrictions on utility ownership and eliminating regulation may impede this progress. Today utilities are free to engage in cogeneration, and do so. Inducing utilities to engage in deregulated cogeneration and small power production may encourage utilities to divert skill and money into unregulated divisions or subsidiaries in the hope of retaining larger profits than otherwise authorized by regulatory commissions. It may encourage utilities to reserve for themselves the cogenerated power for which the highest prices are paid, leaving only lower-valued power for industrial cogenerators. The bills are unnecessary and could also produce perverse effects on the costs of electric power. In addition they could result in less effective regulation by State utility commissions. The company by which I am employed is a cogenerator in the Arkansas Power & Light service area. We have a pulp and paper mill near Cypress Bend, in Desha County, in southern Arkansas. We have had discussions with Arkansas Power & Light about their gasification project, and one of the general concerns that we have with that particular endeavor relates to the subject of reliability, and particularly reliability with respect to steam supply. In most industrial installations, the generation of steam or heat for process use has to be the most reliable thing in a plant, because without it nothing seems to go on. Typically in our industry, the reliability of steam of our boilers is 95-plus percent. And in the particular case in Cypress Bend, in the days when we plan to operate our steam boiler, which is the one currently fired by oil, we would obtain from that 99.7 percent operability. Now, we plan to operate that boiler over 355 days a year. That steam generation continues all the time. It is absolutely crucial to the operation of that kind of a facility. Mr. OTTINGER. Are you furnishing electricity with that steam there? Mr. NICHOLSON. Yes, sir. We produce about 20 megawatts of electricity at that site. Mr. OTTINGER. Do you use it yourself or sell it to a utility? Mr. NICHOLSON. Our use at that site is greater than the amount that we can generate. At another location, in Lewiston, Idaho, we do sell to the utility. It is dispatchable at the utility's request. We operate on a contract in which we produce power for the utility's account when the utility wants it. Mr. OTTINGER. How do these changes in law affect your operation? Mr. NICHOLSON. The concern that we see has to do particularly with the utility ownership-has to do with the development of further cogeneration, and the potential for discouragement that can exist in negotiations with utilities about avoided costs, about a whole host of issues. Last Friday I was in the second round of conferences on cogeneration and small power production at the Idaho Public Utility Commission, and we got into a very complicated discussion in that prehearing conference of identifying how you calculate avoided costs. To take part in cogeneration, you have to take part in these rulemaking proceedings in a very aggressive manner to flesh out all of those kinds of costs which of course are developed wholly by the utility. We have another example in the Arkansas Public Service area, where we are in the process, on a grant from the Department of Energy, of developing a gasification process in which the wood gas will be fired in a turbine to generate electric power. This is currently in the study stage. This particular process was really brought to our attention by Arkansas Power & Light. But their interest in this seems to have faded at this point in time. Thank you. [Testimony resumes on p. 77.] [Mr. Nicholson's prepared statement and a report of the American Paper Institute follow:] STATEMENT OF THE AMERICAN PAPER INSTITUTE TO I appreciate this opportunity to express to the House Subcommittee on Energy Conservation and Power the views of the American Paper Institute ("API") on two bills pending before the Congress H.R. 2876 and H.R. 2992. - My name is William J. Nicholson. I am employed by Potlatch Corporation as Corporate Energy Coordinator. My business address is Potlatch Corporation, P.O. Box 7864, San Francisco, California 94120. I have S.B. and S.M. degrees in chemical engineering from the Massachusetts Institute of Technology, a Ph.D. degree in chemical engineering with a minor in macroeconomics from Cornell University, and an M.B.A. from Pacific Lutheran University. I am a registered professional engineer in the State of Washington. In the past ten years with Potlatch, I have been involved in the Consumer Products Division, the Pulp and Paperboard Group and for the most recent five years as Corporate Energy Coordinator. I am testifying today on behalf of the American Paper Institute ("API"), a national trade association of the pulp, paper and paperboard industry in the United States. API consists of approximately 175 manufacturers that produce 90% of the nation's pulp, paper and paperboard output. This industry is the third largest consumer of purchased electricity among manufacturing industries in the United States. Its annual bill for this form of energy is in excess of $1,650,000,000. major cogenerator of electricity. With adequate economic incentive the industry is capable of producing substantially more electric power through cogeneration and small power production. Thus API has a strong and abiding interest in the development of cogeneration and small power production. Chairman Ottinger, in his letter of April 15, 1981, set forth a number of important questions about the proposed legislation. The first and second of these asked about the effects of PURPA (the Public Utility Regulatory Policies Act of 1978) on cogeneration and small power production. In many ways the answer to these questions sets the stage for comments on the proposed bills, which would modify the approach to cogeneration and small power production embodied in PURPA. Let me first note, however, that there is today no barrier preventing utilities from engaging in cogeneration and small power production. Utilities have done this in the past and will do so in the future. Nor is there any validity in the assertion that industry will not exploit cogeneration and small power production because it lacks the requisite money and knowledge of power production technology. If the economics warrant cogeneration, industry has or can get the funds required. In that the paper industry has been one of the largest cogenerators of electricity for many years, it is thoroughly familiar with this technology. While we have no objection to according investment tax credit benefits to utilities, which has been proposed in other legislation, we oppose H.R. 2876 and H.R. 2992 because any potential benefits from these proposals are far outweighed by their potential adverse effects. 1-2. Section 210 of PURPA Has Been Successful; Section 210 of PURPA has been successful. As it is now being applied, it has brought about an increased interest in cogeneration on the part of the American paper industry and on the part of industry at large. Cogeneration results in the generation of electric power and process steam with far greater fuel efficiency than can be obtained by the separate production of steam and electricity by industry or electric utilities. (Utility central generation will rarely exceed 40% efficiency, while cogeneration can be over 80% fuel efficient more than double that of the utility.) In the past, for many reasons, it was difficult to get electric utilities to take seriously our potential for supplying - |