tempting to do here is to reduce the impact on utility rates and on the economy by giving that option.

Most of the trading will in fact be intra-utility, and most of the trading will in fact be intrastate, and the case that you mentioned, Senator Johnston, was, I think, an anomaly where a state would have not the opportunity, internally, to do most of the fuel switching or technology improvement or conservation internally.

The CHAIRMAN. Let me just read one thing, then I will turn it over to Senator McClure: a paragraph from a letter from the Southeastern Association of Regulatory Utility Commissioners which states that:

In particular, tonnage caps as contained in the Administration's bills, or required tonnage reductions from a historical base year, would severely penalize growth states like those in the Southeast.

The tonnage caps in H.R. 3030 and S. 1490, along with market-based allowance programs, would leave a core group of higher emission rate, primarily midwestern states, with allowances to sell.

At the same time, clean and growing states like those in the Southeast would be required to pay premium prices for the obligation to serve increasing customer bases.

With that, I will turn it over to Senator McClure.

Senator MCCLURE. Thank you very much, Mr. Chairman.

I want to shift gears a little bit, but before getting into specific areas, Mr. Rosenberg, I want to understand one of the charts you used. It is not explained in your statement.

I refer to the chart on "Clean environment does not mean less economic growth." I am not quarreling with that chart. I want to know what it means.

You show electricity sales of 76 percent. How is that measured? Is that in units or in dollars?

Mr. ROSENBERG. I think it is kilowatt hours, actually.

Senator MCCLURE. Are you sure of that answer?

Mr. ROSENBERG. I am not. I can get that.

Senator MCCLURE. Does any one of your army behind you know the answer to that question?

Mr. BRENNER. What we tried to do there is create an index. What we have done is normalized everything to an index.

Senator MCCLURE. I want to know what that normalized index is. Is that in dollars or kilowatts?

Mr. BRENNER. The way you measure sales is in either kilowatt hours or in dollars. In this case, we are showing the increase in kilowatt hours sold.

Senator MCCLURE. That is kilowatt hours on electricity sales?
Mr. BRENNER. Right.

Senator MCCLURE. And GNP, how is that measured?

Mr. BRENNER. GNP is normally measured in dollars, and that is how we did it for this chart.

Senator MCCLURE. Are they adjusted dollars, or inflated dollars? Mr. BRENNER. Adjusted dollars.

Senator MCCLURE. Adjusted to what base?

Mr. BRENNER. They were all adjusted to the same year. I believe it was 1987 dollars.

Senator MCCLURE. 1987 dollars. The next line I cannot see on my chart. Coal use. Is that in dollars or in tons?

Mr. BRENNER. Tons.

Senator McCLURE. Tons?

Mr. BRENNER. Yes, sir.

Senator McCLURE. And the emission? What is that?
Mr. BRENNER. Emissions is also in tons.

Senator MCCLURE. Okay. Thank you very much.

The CHAIRMAN. May I interrupt just a second? Staff tells me something and I do not want the impression to get out, and the answer may have given the wrong impression. My question was, if you clean up by 1994 can you bank those and keep those, even though you do not use them?

As I understand it, you can do that only if you are one of 107 plants. If you are in a clean state you cannot do that, even though you clean up.

Mr. ROSENBERG. Senator, you can. The 107 is the minimum that has to be in the system. If another plant wants to come into the system, they can register, establish the baseline and get credit as well.

The CHAIRMAN. Say that again.

Mr. ROSENBERG. The 107 is required, but if you wanted to start the cleaning of another plant prior to that time, say the 108th plant, you can register that with the program and get the credits, so other plants can come in-can opt into the system.

The CHAIRMAN. That is only in the President's bill. That is not in the EPW bill. Is that correct?

Mr. BRENNER. The EPW bill.is not clear on that point, and it is ambiguous, and the best reading is probably that you would not be able to do it under the EPW bill.

The CHAIRMAN. If you cannot do it, you cannot get the credit, then you would be foolish to go spend the money and clean up before the year 2000, is that not right?

Mr. BRENNER. Well, for example you may decide that if you contract for lower sulfur coal before 2000 it is cheaper, you can get a better deal on it, and you may decide to do it anyway, but it certainly is a disincentive compared to the case as in the Administration bill, where you could bank those allowances and use them later.

Senator WALLOP. Could I just ask one thing, is there not an option for states to opt to not be clean states and gather the credits? Can you not opt out of the Clean State program and gather the credits and then operate normally until 2000?

Mr. BRENNER. Senator Wallop, the Clean States provision is not in the Administration bill, it is only in the Senate bill, and it is not our reading of it that you could opt out of the Clean States program, and we have identified a number of states that probably would be better off being out of the Clean States program, yours being one of them.

Senator WALLOP. That is a strange thing to do to a state, is to ask not to be considered clean-but as you read it, you cannot opt out. Is that right?

Mr. BRENNER. That is my understanding of it, and the reason it is better for some states like New Mexico and Wyoming is that if you were not included in the Clean States provision you would be

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lowances for your clean units. That is far more beneficial to you than the requirements of the Clean States provision.

Mr. ROSENBERG. And we very much do not support that Clean States provision, because there are many clean states like Louisiana that are not clean because they scrub coal, and they should not be discriminated against.

Senator ROCKEFELLER. Senator McClure, can I just put one question in?

Does it strike you gentlemen as interesting, number one, and, number two, fair that, for example, Texas which is among the top emitters of both NO, and sulphur dioxides is totally untouched by all of this because it happens to come from oil refineries and not from power plants? Does that strike you as either correct in fair or fair in principle?

Mr. ROSENBERG. Well, there are many things that Texas has to do in the air toxics portion of the bill that are very substantial. We did an analysis that assessed how much of the cost would be borne by the dirtiest states. I have a chart I want to show you, if you would like to see it, and whereas the five states with the most emissions had in 1980 50 percent of the emissions, they are indeed required under this bill to reduce 65 percent to get 65 percent of the reductions.

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However, because the reductions in those states are less expensive per ton, they would only get 50 percent of the costs of reductions so that even in the nine states that have the greatest amount of obligations under the bill, the nine states with the greatest SO2, their proportion of costs are about equal to what the total lowering of emissions was.

From a rate point of view, the five hardest hit states start out with approximately a six cents per kilowatt hour rate in 1987. That is about 10 percent lower than the national average.

Their rate increase under the bill in these five states is about three-tenths of 1 cent a kilowatt hour, or 5 percent on the average. The rate increase in the other parts would be about 1 or 2 percent increase, but when it was all done, the five hardest hit states would still have average rates that were lower than the national average. Senator ROCKEFELLER. Senator McClure, I apologize to you, but that was unfair of me, but I have to go meet the Vice President, and so I thought that would be excusable.

I would simply point out for the record that-

Senator FORD. Meet who?

Senator ROCKEFELLER. The Vice President. I thought that would gain me credibility with Senator McClure. [Laughter.]

Senator MCCLURE. You did indeed. I am sorry it cost you so much elsewhere. [Laughter.]

Senator ROCKEFELLER. But, Mr. Rosenberg, you will admit that what you are talking about, this so-called cost in the Midwest, has nothing to do with unemployment. It does not take into account rail rates or the higher cost of low sulphur coal?

Mr. ROSENBERG. That is correct.

Mr. BADGER. Senator, if I could just repeat what I said earlier, as far as the regulatory commissioners of the country, we share that concern and believe that industrial emitters should come under the umbrella of this bill.

It is estimated there are 10,000 of them and they are contributing one third of the SO2 emissions.

We, as I said before, we recognize the difficulty of trying-for EPA to try to administer that quantity of emitters, but there may be some merit, at least, to having size threshold facility included in this legislation.

Mr. ROSENBERG. When we discuss the air toxics and non-attainment provisions tomorrow, I think you will see how heavily, in fact, the industrial emitters in the oil industry and the other industries are, in fact, covered by the bill.

That is one of the reasons why we felt that if we could resolve the issue of SO2 on the utility sector and do it in an equitable way in the context of a total clean air program that that made sense. Senator MCCLURE. I am fascinated by this idea of what kind of a market is going to develop in the exchange of credits. I think those of us who have elected not to run for reelection have a great growing opportunity out there. I can just see it now. The futures market on emissions credits 18 years from now, what is that contract worth? And I am going to find a way to make that worthwhile for some, maybe myself. [Laughter.]

For example, a utility building a new plant or making a decision on a new plant is going to try to cover that plant for the remaining useful life of the plant. That might be 15 years. Let us just pick a number or 10 years, and in buying credits he is going to want to cover each year of the operation of that plant as is a person with a credit going to obligate their credits for the next 20 years?

Mr. ROSENBERG. They certainly could, and that utility has the same problem on coal and in some cases they may lock up the coal 100 percent to their needs over the duration of the operation or they may have some contract coal and some spot coal and perhaps lock up 50 percent of the coal and plan to buy 50 percent on the open market.

We would expect that the utilities would approach this requirement precisely the same way they approach the coal requirement. They do not hoard coal, they would not hoard these. They may buy things on long-term contracts. They may negotiate short-term contracts. That is how the market will work, to reduce the cost to the ratepayer.

Senator MCCLURE. People look at things like hoarding. That is a loaded term around this town. It depends upon who looks at that as to whether that is hoarding or not.

I remember not long ago when coal companies that had longterm contracts and commitments said they were hoarding coal because they had federal leases to cover those commitments, and so some people-even some on this committee were condemnatory of that practice and called it hoarding. And so, I guess it depends.

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Mr. ROSENBERG. There is another point on allowance availability that should be emphasized here. Beginning in about 2010 many the plants that Mr. Dowd talked about, the old 1950s plants, will retire because they are obsolete environmentally and economically, and they will be replaced by newer plants that will operate at a much lower rate than the 1.2 pounds that the older plants are permitted to operate under, and that will free up emissions and par

ticularly if the Department of Energy's clean coal technology works out as well, the program works out as well as we hope.

And so, you will be replacing by retiring the older, dirtier plants, you will be making available two, three, or four times as much allowances in terms of capacity that were required from the old plant that now can be employed by new technology.

Senator MCCLURE. My time is limited, as is every member of the panel on your side and on our side as well. I want to shift away because there are other issues than the credits issue and the marketing and credits.

Ms. Stuntz, there does not appear to me to be any economic justification or at least I have not seen one for the trading ratios of one and one half NO, for one SO,. That is contained in section 403(c). Can you provide us with the technical basis for such a ratio?

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Ms. STUNTZ. I would happy to, and I think your question assumes the answer. It is largely a function of what we understand about the contribution of NO, to acid rain formation versus the contribution of SO,. Probably Mr. Brenner or Mr. Rosenberg could give you the physical details on that better than I can, but that is the basis for that trading ratio.

Senator MCCLURE. I would like to have whichever. Do you, Dr. Mahoney, or you, Mr. Rosenberg, have the scientific justification for that ratio?

Dr. MAHONEY. Senator McClure, the one and a half to one ratio is approximately the ratio as far as the basic substances are concerned.

That would mean an equivalent amount of hydrogen ion with the basic acid measure would be deposited. Because of the differences in molecular weight, one and one half tons of nitrogen oxide would produce as much acidity as approximately one ton of sulphur oxide. That was behind the general consideration.

The exact proportion could have been stated, but it would have been futile, in fact. There would have been no point in trying to use the exact molecular rate ratio, which would have been slightly different, because any attempt to interrelate also has to consider whether the sheer acid forming potential is the only aspect or whether there are other aspects as well.

My prepared statement, in fact, deals somewhat with the matter. We recognize there are some important considerations about nitrogen oxide controls that are different than the simple ratioing of acidity, and I think it is fair to say no one has a universal answer to that. We debated that a good deal in the last several months, and even as a technical matter the issues come down to the fact that the nitrogen species has different impacts, some actually even beneficial, but mostly still adverse.

Nitrogen is, after all, a fertilizer and that by itself can be good or bad. But, in addition to the deposition part, there is yet another consideration about nitrogen. Nitrogen oxides are involved in the formation of ozone in the atmosphere, and we know there are substantial adverse effects from ozone.

Anyway, the bottom line of all of that is that in a great deal of discussion, there was no agreed technical basis to pick something other than the approximate molecular weight ratio at this time given what we know.