Hearings and Business Meetings
April 12, 2006
2211 King Boulevard, Casper, Wyoming Wyoming Oil and Gas Conservation Commission Building 01:30 PM
Mr. Steve Waddington
Executive Director, Wyoming Infrastructure Authority
United States Senate
Committee on Energy and Natural Resources
The Future of Wyoming Coal
April 12, 2006 Hearing
Wyoming Oil and Gas Conservation Commission
Steve Waddington, Executive Director
Wyoming Infrastructure Authority
Mr. Chairman and distinguished members of the Committee, thank you for inviting me to make this appearance before you today. My name is Steve Waddington. I am the executive director of the Wyoming Infrastructure Authority. The Authority is an instrumentality of the state of Wyoming. Our mission is to diversify and expand the state’s economy through improvements in the electric transmission system to facilitate increased utilization of Wyoming’s energy resources. Earlier this year, the Wyoming state legislature expanding the Authority’s role to also take a leadership role in supporting emerging advanced coal technologies as it relates to electricity production.
I believe the future for Wyoming coal is bright – but only if we work proactively to address market and infrastructure challenges that have the potential for eroding Wyoming’s share of the national coal market long term. My testimony will touch on three areas of concern related to the future growth and development of Wyoming coal. In all three issue areas, Congress and the Federal Government have important roles to play, in collaboration with the State, to overcome these market and infrastructure obstacles. My three topic areas are: 1) the need for transmission investments; 2) the need for advanced coal technologies to emerge on a commercial scale using Wyoming coal at Wyoming altitudes; and, 3) the captive shipper issue.
The Need for Transmission Investment
One value-added means for future growth and development of Wyoming coal is to ship coal by wire, instead of by rail. Generating electricity from coal in Wyoming, and shipping the product by wire, will create jobs and other economic base for the state. Coal-fired generation in Wyoming, combined with Wyoming’s world-class renewable wind generation potential, offer an attractive option for utilities throughout the western interconnect. Many utilities serving fast growing urban areas in the west have relied heavily on natural gas-fired generation in recent years to meet their growth. These utilities are now seeking alternatives to diversify their power supply and Wyoming has abundant natural resources – and a political will to deploy these energy resources – to help meet growth in the west. The key for unlocking this value-added expansion of Wyoming’s economy is adding to the transmission infrastructure.
It is critically important to recognize that the existing electric transmission system was built by electric utilities in a vertically integrated manner. As a result, the existing system was built and sized to serve local customers, integrate utility-owned generation and to support reliability. In addition, the existing regulatory and institutional system relied upon to address congestion and facilitate resource development on the grid has not functioned well. A wide variety of regulatory, financial and policy uncertainties have significantly slowed the pace of both private sector and public power system investments in the utility transmission system. The impacts of these uncertainties on the consumer and overall economic activity have been, and continue to be, profound. Unless immediate improvements to the transmission grid are made, increasing pressure on existing facilities will intensify and system reliability will erode. At the same time, the Nation could find itself continuing to over-rely on natural gas fired generation located close to load centers. Such an outcome would not further the national interest. Each of these concerns has a particular significance for the West.
In the West there is intensifying interest in securing a more diverse power supply through increasing reliance on low cost fuels, such as coal and wind, that are abundant in areas of the West, but that are distant from load centers. However, with few exceptions, in the West the transmission system was not designed to support economic transfers of power or the development of new sources of supply. To enable this development to occur will require new transmission facilities.
The Western interconnection is especially vulnerable as a result of growth in the region. To meet these needs, load serving entities are seeking to build new power generation to keep pace with both the retirement of aging power stations and the need for more capacity to meet growing electric power demand. This, along with increasing requirements for fuel diversity to offset natural gas reliance and improved environmental performance, is placing added pressure on existing transmission facilities. There is an immediate need for transmission upgrades to enable additional transmission-dependent generation facilities to serve load growth in the very near-term.
The Wyoming Infrastructure Authority was created to help address this issue in a positive way for Wyoming. The Authority has embarked a several transmission development feasibility projects. Our pending projects are summarized briefly below.
TOT3 Partnership with Trans-Elect and Western
The Authority has entered into a partnership with Trans-Elect Inc. to pursue development of new electric transmission between Colorado and Wyoming – known as TOT3. The Western Area Power Administration (Western) has joined the WIA and Trans-Elect to work jointly together on the TOT3 project to determine the public service benefits and interest in this transmission upgrade. Interest expressed in the proposed line ranges from between 2,100 MW and 7,300 MW of additional capacity, including prospective coal and wind project developers. Load serving entities in Colorado have also expressed interest. We are now entering the technical feasibility study phase on this project.
Wyoming-West Partnership with National Grid
The Authority has also entered a public-private partnership with National Grid USA to jointly conduct a transmission study that will help lay the groundwork for a significant increase in electric transmission capacity between Wyoming and neighboring states in the west. This project is dubbed Wyoming-West. The Authority is also in active discussions with Western, which operates one existing corridor between Southwest Wyoming into Utah, and Western is actively interested in working with us on the Wyoming-West endeavor as it moves forward.
TransWest Express Partnership with Arizona Public Service
Arizona Public Service Company (APS), National Grid and the Wyoming Infrastructure Authority (WIA) signed a Memorandum of Understanding (MOU) in early March to collaborate in developing new electric transmission lines between Arizona and Wyoming. This MOU expands upon previous announcements by APS in October 2005 to begin development of the TransWest Express Project and by the WIA and National Grid in December 2005 that they would jointly undertake the Wyoming-West Transmission Study.
Arizona and neighboring states are experiencing significant growth in electricity demand. To help meet that growth, APS envisions construction of two new 500,000-volt (500-kV) transmission lines from northern Arizona, through Utah to Wyoming. APS and other utilities in the west are attracted to Wyoming as an abundant source of low-cost wind and clean coal generation. The TransWest Express Project will be designed to help meet growth in demand with low-cost sources of supply from Wyoming.
The Frontier Line
In April 2005 four western Governors joined and announced their memorandum of understanding to stand ready to support a major transmission corridor development between California, Nevada, Utah and Wyoming. The Frontier Line will be designed and developed to ensure citizens of all four sponsoring States benefit from it. The four sponsoring Governors recognized our region needs a significantly more robust interstate electricity system in order to enable access to more sources of clean energy. The Frontier Line will deliver this goal for millions of consumers across the West.
In the past year there has been significant groundwork laid. The Authority has been actively involved, providing technical and financial resources toward the successful development of this project. Next week, on April 17-18, the four sponsoring Governors are hosting a major energy conference to be held in San Diego. A significant announcement is planned for this event, laying out the plan for actively beginning the detailed feasibility study of the Frontier Line concept.
Moving to federal actions, Congress recognized the challenges related to transmission development with a number of measures in the 2005 Energy Policy Act. In particular, the Department of Energy’s role to study and designate critically important transmission expansion needs as corridors that are in the National Interest, and the Federal Energy Regulatory Commission’s backstop siting authority related to corridors so designated, is a critically important initiative. For the West especially, where transmission is needed across long distances involving several states, and likely over vast tracts of Federally-managed lands, FERC’s potential back-stop siting role could be a significant help.
The Department of Energy needs to be encouraged to move ahead as quickly as possible with the designation of National Interest Electric Transmission Corridors (NIETCs). DOE should also accept proposed projects early for DOE review and possible early designation, where projects are already underway. The Authority provided DOE with comments recently raising a number of concerns with its proposed approach. These comments are summarized below.
• It is critically important that DOE’s designation of corridors not be limited to those where persistent congestion obtains today. Doing so would put an inappropriate brake on the legislative intent to encourage transmission infrastructure to develop to reduce consumer prices and diversify the fuel mix.
• DOE must expedite the study and designation of NIETCs, and do so by designating corridors for potential projects broadly, as generalized paths between two (or more) locations.
• DOE must fully recognize the features and characteristics of the Western transmission system, and take into account the numerous studies that have already demonstrated the need for, and benefit from, transmission infrastructure investment.
• DOE should recognize several ongoing major transmission expansion efforts in the West, including the Frontier Line, the TransWest Express Project and WIA’s two ongoing projects in partnership with Trans-Elect, Inc. and National Grid USA, and anticipate that one or more of these projects will likely apply to DOE for early designation as a NIETC.
• DOE should remain flexible and in a position to accelerate an early review and the designation of corridors on a case-by-case basis, and establish the application process for such early designation.
The Authority can issue revenue bonds to finance transmission investments, including extending up to $1 billion in borrowing capability to the private sector. Several other States in the west have following Wyoming’s lead, creating state bonding authorities to finance transmission infrastructure. Today, because of a IRS rule known as private use restrictions, these public sector bonds would not be Federally tax exempt except under very limited and unlikely circumstances.
Congress should consider relaxing the private use exemption for transmission investments. The exemption should be relaxed for certain circumstances, such as for investment in a corridor that has received a national interest designation or is being financed by a public entity such as the Wyoming Infrastructure Authority. Another alternative would be for Congress to allocate an amount of tax credit bonding authority for state entities to use to finance important needed transmission infrastructure. By either means, tax exemptions or tax credits, the cost of financing the transmission investment would be significantly reduced. Lowering the cost of transmission investments would help to stimulate its development and deployment, and will reduce the costs to consumers.
Senator Kent Conrad is working on a bill to promote energy production and one of its provisions would relax the private use exemption in certain circumstances. The language in the draft bill on tax-exempt bonds would recognize the Wyoming Authority to be a governmental entity and thus qualify relative to waiving the IRS private activity rules – making WIA bonds a federally tax exempt issuance. This provision is meritorious and I respectively ask the committee to strongly consider it on its merits.
Advanced Coal Technology
Congress, with the leadership of this committee, has signaled in the Energy Policy Act last year the Federal Government’s intent to continue to stimulate and support clean coal technology and synthetic fuels production. Wyoming needs to be actively participating in these Federal programs. These technologies must be developed to work and to emerge on a commercial scale using Wyoming coal at elevation. Otherwise, as these technologies become mainstream elsewhere in the nation, Wyoming’s coal market share will be threatened.
The Governor and the State legislature have taken a number of significant steps to position Wyoming strategically to secure a value-added utilization of coal through advance technologies. A Clean Coal Work Group is actively engaged. The Infrastructure Authority and the Pipeline Authority are both actively involved in this effort.
Emerging advanced coal technologies are a significant opportunity for the future growth and development of Wyoming coal. Wyoming’s coal market potential can be viewed in terms of a value chain. Currently, the commodity, coal, is produced and primarily directly sold and shipped by rail for use in electricity generation around the country. But in the future there are a number of products and co-products that will be profitably produced from Wyoming coal. If petroleum prices continue their recent upward trend, these value-added markets will become increasingly commercially viable. The figure below shows the value chain with coal as the base commodity. As the value of coal-derived commodities increases, the likelihood of moving even further up the primary products value chain increases. Additionally, the co-products of water and hydrogen could have potential economic value as the nation moves toward a hydrogen economy.
FutureGen is a government-industry cost-shared project to design, build and operate the world’s first coal-based, near-zero emission power plant. The plant will also produce hydrogen and byproducts for use by other industries, while capturing and permanently storing carbon dioxide in deep geologic formations.
A FutureGen industrial alliance has been established and on December 2, 2005, the U.S. Department of Energy entered into a cooperative agreement with the alliance to begin the site selection process and prepare a conceptual design for the facility. The Alliance has issued its RFP inviting proposals for host sites upon which to build and operate the FutureGen plant.
The State of Wyoming has submitted its notice of intent to submit a proposal responding to the FutureGen Industrial Alliance’s RFP for host sites sponsors. The detailed proposals are due May 4, and the Governor’s office is leading a concerted effort to put forth a competitive proposal. We intend to compete vigorously for FutureGen to be developed in Wyoming.
A total of nine states have formally expressed interest in hosting the FutureGen project, representing as many as 22 proposed sites. Given the complexity and rigor of the proposal process, there will probably be some attrition in the application process and less sites actually submitted by May 4. The process will then move to a short-listing of candidate sites to be announced this summer. Then DOE will take one year to develop an environmental impact statement, and then issue a record of decision with a likely even shorter list of sites that it deems acceptable. The Alliance will then select the one preferred site from this shorter list by around September, 2007.
We believe Wyoming has a competitive edge because of our strong position for permanent storage of carbon dioxide – which is one of the key deliverables in the FutureGen project scope. That said, the application criteria are rigorous and the competition will be fierce. We expect that Wyoming will at least reach the short list and continue to be considered as DOE does its environmental study work.
Section 413 – a Western Integrated Demonstration Project
The FutureGen application effort will also help position Wyoming strategically to seek an appropriation and allocation of Federal program funds to support a Western Integrated Coal Gasification Demonstration Project using western coal at elevation. Section 413 of the Energy Policy Act calls for this demonstration project as a means for ensuring that coal gasification technology emerges on a commercial scale using Western coal and operating at Western elevation. Wyoming is very interested in working to ensure that this program is funded, and we believe Wyoming will merit strong consideration as the location for this demonstration project.
The Captive Shipper Issue
The captive shipper issue is a threat to the production of coal and other key commodities in Wyoming, as it is in rural America generally. A captive shipping customer is one who, by virtue of its physical location, has access to only one rail provider. Captive shippers pay rail rates of up to 450 percent above railroad costs, by one statistic I’ve seen, as opposed to the 6 percent above railroad costs paid by shippers where railroad competition exists.
One Wyoming example is the Laramie River Station, a coal-fired generation facility located near Wheatland, Wyoming. This power plant is vital for serving the electricity needs of consumers served by cooperative utilities across Wyoming. It is served by one railroad, which transports 8.3 million tons of coal annually from the Powder River Basin south 175 miles to the plant. The power plant’s contract with the railroad expired last year and the railroad renewed the contract with dramatically higher rates. At four times the railroad’s average coal hauling rates, these new fees will cost electric customers $1 billion over the next 20 years. Since the power plant is captive to this sole practical option for shipping the fuel it needs to produce power, there was little choice but to accept what would appear to be the exercise of monopolistic advantage and, with that, a very rate increase.
Congress needs to act and bills are pending. The Railroad Competition Improvement and Reauthorization Act (S. 919 and H.R. 2047) would clarify and ensure that the primary objectives of the nation’s rail transportation policy are:
• To maintain consistent and efficient rail transportation service for shippers, including the timely provision of rail cars requested by shippers;
• To promote effective competition among rail carriers at origins and destinations; and,
• To maintain reasonable rates in the absence of effective competition.
The Railroad Antitrust and Competition Enhancement Act (H.R. 3318) would also help promote competition among railroads and provide better rates for shippers. This competition enhancement act would amend the Clayton Act to eliminate the antitrust exemption applicable to railroads.
In conclusion, the future for Wyoming coal is bright – but only if we work proactively to address market and infrastructure challenges that have the potential for eroding Wyoming’s share of the national coal market long term. These significant challenges include: 1) the need for transmission investments; 2) the need for advanced coal technologies to emerge on a commercial scale using Wyoming coal at Wyoming altitude; and, 3) the captive shipper issue. In all three issue areas, Congress and the Federal Government have important roles to play, in collaboration with the State, to overcome these market and infrastructure obstacles.
Thank you for the opportunity to appear before the committee today. This concludes my testimony. I would be pleased to answer any questions you may have.