The Remarks of
Daniel Wm. Fessler
Managing Principal
Clear Energy Solutions, LLC
Story, Wyoming San Francisco, California, Cheyenne, Wyoming
Before the
Wyoming Pipeline Authority
Casper, Wyoming
December 14,
2004
Mr. Chairman and members of the
Authority: For the second time I have the privilege of offering
suggestions on how the natural resources in my native state may be developed to
diversify and broaden Wyoming’s economy and deployed in the service of
neighboring jurisdictions and our nation. On October 14 I spoke before
your colleagues at the initial public hearing held by the Infrastructure
Authority to outline the vital role that enhanced electric transmission
facilities must play if we are to succeed in what I have termed a “no regrets”
policy of economic development and environmental stewardship.
Two months to the day I return to Casper to avail myself of your kind
invitation and the privilege of speaking to your equally critical role in
creating a climate in which the private sector can build and deploy an industry
that will co-generate electricity and produce synthetic vehicle fuels from
Powder River Basin Coal. Each facility will offer between two hundred
fifty and two hundred seventy secure, full-time jobs. Each will add
significant local tax base and a long-term community presence. Each
facility will address two critical national needs: reliable and
affordable electricity, and synthetic transport fuels
derived from Wyoming coal rather than Middle Eastern
crude. Equally important, these jobs, tax revenues and critical products
will be produced from facilities that do not pollute the air, water or
land. They will produce significant amounts of carbon dioxide but it will
not go into the atmosphere. Instead it will be sequestered having first
been deployed within fifty miles of this city to revive the region’s
significance as a source of domestic oil production and enable the recovery of
coal-bed methane with a footprint far more agreeable to the owner of the surface
estate.
As each of you appreciates better
than I, the Wyoming Legislature created this Authority, and a year later
followed it with the Infrastructure Authority because---in collaboration with
Governor Freudenthal---our elected representatives
were determined to use the State’s current budgetary surplus to transform the
economy as opposed to provide a brief run of economic good times. The
coal-to-synthetic fuels and electricity plants that I am advocating may be the
first to challenge the agenda of each Authority and require an amendment to
your organic act expanding your responsibilities and augmenting your
authority. We cannot develop markets for Powder River coal west of the Basin without the
coordinated guidance of both bodies in securing access to electricity markets
by wire and the urban and rural transport, construction and agricultural
markets by product pipeline. The challenge is daunting
but let’s take a few minutes to grasp just what success would mean to Wyoming, the west and the nation.
But before I do so, it may not be
remiss to introduce myself because I have been gone a long time. Mr.
Chairman I may be the only graduate of the Torrington public schools to appear at this
hearing and surely the only one to have done so by undertaking a journey from San Francisco. The link between Torrington and California is the short version of my
biography. Like too many high school graduates, I left Wyoming at the age of eighteen. That
was some forty- five years ago. I spent seven years in Washington, DC attending college and law school at Georgetown. For a part of that time I was
the gopher on Milward Simpson’s Senate staff.
In 1966 I overshot Wyoming and wound up in San Francisco as a law clerk on the federal court
of appeals. I next became a schoolteacher spending twenty-five years on
the faculty of the University of California where I taught contracts, business
organizations and securities regulation.
In 1991 I accepted a
challenge from Pete Wilson to take leave from the UC faculty and serve a
six-year term on the California Public Utilities Commission. The
fact that I had no involvement with, or experience in, the energy,
telecommunications, water and transport mandates of that Commission made me the
ideal candidate. It was Oscar Wilde who observed that a “man about
to be married should know everything or nothing.” It would appear that
the same standard obtained for appointive office in California. Six years later, many would
claim that I left that office with my ignorance unsullied.
They would not be totally correct for
I learned that the thirty-six million Americans who reside in California are in a very dependent posture when
it comes to energy, and, for that matter, water. The Commission’s mandate was
to seek an adequate, reliable and reasonable priced supply of energy that, for
us, meant concentrating on electricity and natural gas. I spent the first
three years working out a settlement of the dispute between the State of California and the Province of Alberta over the terms of the natural gas
trade that, at the time, was one of the largest deficits in the US balance of payments. Each year
California exported two and one half billion
dollars and Alberta exported natural gas under pricing
arrangements viewed in California as the functional equivalent of a
cartel. As I sought to open that market to competitive forces and free
trade, I began to wonder about the wisdom of compounding our nation’s
dependence upon foreign oil reserves with an insatiable appetite for yet
another imported energy commodity.
In February 1993, I
startled members of the state Senate Energy Committee by suggesting that
serious consideration be devoted to shifting a significant portion of our
future need to western coal. The hearing had been called to consider the
long-term implications of the state policy to promote zero emission cars.
No one disputed the pressing health and economic impacts of the dirty air that
marked both our urban centers and agricultural valleys. Electric cars would
dramatically reduce the incidence of mobile source emissions but the successful
deployment or large numbers of such vehicles would drive up the demand for
generating capacity. No committee member denied that coal was an abundant
domestic resource from which additional electricity could be generated.
But, and to several members of the Committee this was the controlling factor,
all we would accomplish by the utilization of coal was to shift the incidence
of pollution from the point of consumption to that of production. Coal fired
generation, I was reminded, belched tons of acid rain producing sulfur into the
atmosphere, emitted vaporized metals such as lead, mercury and vanadium, and
constituted the number one source of carbon dioxide emissions which caused
global warming. The year was 1993.
In December 1996 my term
on the Commission expired. I had taken voluntary early retirement from
the University and was obliged by California’s anti-revolving door statutes to
find employment either in areas that had nothing to do with energy,
telecommunications, water or transport or to pursue such interests outside of
the state. I elected to retain the interest in energy and joined a New York law firm that specialized in
international work for both government and private sector interests aimed at
building out infrastructure in third world economies. The work was
fascinating but a long way from home.
In 2002 I proposed to my
partners that we begin to seek solutions to the immediate and long-term issues
presented by America’s increasing dependence upon
petroleum imports. My interest was again centering on coal. In that same
year client assignments in South Africa drew my attention to the fact that
virtually all of the heavy transport fuels used in that country are produced
from domestic coal reserves using what is termed “Fischer Tropsch
technology.” My curiosity having been stimulated, I began to discuss this
technology with former colleagues at the University and contacts in the federal
Department of Energy. What I learned was startling and stimulated a
journey back to
Wyoming and this Authority.
In remarks to the Infrastructure
Authority I took as my text the motto on a poster in the Denver Airport. It dealt with Kermit the
Frog, a creature that eats flies, dates a pig and yet is a mega-star. The
lesson I derived was that in this life the only chance any of us have is to
play the hand we are dealt. In Wyoming the high cards in our hand are black
reflecting our history in oil and our future in coal. If we are to play
that hand we need two things: an accurate understanding of markets and a
sound assessment of what we need to develop if we are to reach them with
value-added products that created jobs and sustainable growth in Wyoming. With your permission I would
first like to concentrate on the markets.
It was J. C. Penney,
then a small merchant in Kemmerer, who remarked, “it is always easier to sell a
man something he needs.” Such an obvious truth hides the challenge for to
determine what is needed the potential seller must grasp the plight of the
potential customer. So what is the plight of potential customers for Wyoming’s energy products? In my view
the significant problems center on acceptable air quality, and reliable and
affordable electric energy and transport fuels. These problems are
“significant” in the sense that they impact millions. Beyond the numbers
the significance lies in their threat to our way of life as Americans. As you
listen please bear in mind that while I am seeking to come home to Wyoming I begin that journey in California.
Air quality in California is unacceptable, not just in our
cities but in our great agricultural valleys. Throughout the west the
heavy transport infrastructure is beset by fuel prices that are idling deliveries and increasing the cost of every service
and product to the point that many doubt the sustainability of the nascent
economic recovery. Natural gas prices reflect a scarcity premium that
shows no signs of abating and every indication of getting worse. At a
national level dependence upon the import of petroleum drives much of our
foreign and defense policy with the consequence that an increasing proportion
of our citizenry is, on alternate days, frightened, angered and confused.
To be certain each of these problems
is felt in Wyoming and it is ironic that they are most
threatening in the Powder River Basin. But they are exacerbated in
my adopted state of California for the simple reason that there are
so many more of us. Our air is worse, far worse; our prices are high,
much higher; and our dependence on imports of energy from both international
and domestic sources is the greatest drain on our economy. State and
federal economic forecasters unite in warning that the dramatic run up in
energy and fuel prices is hindering the economy. Placed in real terms, in
October the difference between what Californians paid to fuel their vehicles
when contrasted with the same month in 2003 was $39 million per day.
Startling as this figure is it merely suggests the enormity of the economic
dislocation. The fuel scarcity premium begins at the pump and then is
collected in a perverse multiplier with enhanced costs being recovered for
every item in the economy that depends on transport.
The problem I am describing would be
bad enough if our only challenge was to pay for it over and over. But the
cost is reckoned in more than fuel prices. The truly challenging
realization is that, as of this morning, California does not even have a plan that would
achieve compliance with federal ambient air quality standards for such criteria
pollutants as NOx, SOx and
particulate matter. If you visit the web site of the federal Environmental
Protection Agency you will find a county-by-county map depicting in purple all
those that fall under the category of “extreme non-attainment.”
The Agency’s enforcement division has
studied this map and used its color scheme to allocate the option of a glide
path or “cold turkey” approach toward compliance with the 2006 and 2008 fuel
reformulation mandates. Purple is the code for cold turkey and most of California and nearly all of southern California glistens like a ripe plum. In
practical terms this means that on June 1, 2006 all on road usage of diesel
transport in all non-attainment air sheds in California will have to switch to
a fuel in which the sulfur content has been reduced from 140 to 15 parts per
million and the volume of aromatics (the industry’s romantic term for the soup
of respiratory assailing chemicals emitted as a cloud of black smoke from the
tail pipe) is similarly curtailed. And where are we to obtain such
fuel?
An answer to a question relating to
developments some two years from now is, by definition, a prediction. Yet
I will predict that the demand for reformulated diesel fuel
by the transport and agricultural sectors of California’s economy will
not, indeed, cannot, be met by an adequate supply refined within the state or
imported from other western jurisdictions. This prediction is rooted in two current
facts.
First, starting eight months ago
price signals revealed a current shortage of refinery capacity in the
West. All your adult life you have been vaguely aware that diesel sold at
a discount---often as much a ten to fifteen cents a gallon---when compared to
87 octane gasoline. In the late spring with little notice and virtually
no comment in the media, that situation reversed in many sections of the west
and most markets in California. Today it is not uncommon for
diesel fuel to command a premium of five to ten cents per gallon. The
situation I am describing obtains in Carson, California as well as Casper and Cheyenne. The impact has not been
startling but it has already produced disruption in the heavy transport
infrastructure. Local and short-haul freight deliveries from California’s ports are handled by heavy
trucks. Many of these units are owned by sole proprietors who make a
livelihood using their puller to haul trailers that had arrived by ship or rail
in the distribution of goods. There are fewer of them on California’s roads today because many of the
driver-owners find that they can’t make a livelihood paying as much as $2.40
per gallon for diesel.
I have alluded to the second
factor: the pending EPA regulations slated to go into effect on June
1, 2006.
Refiners throughout the west face a choice: invest in expensive new
equipment needed to produce the low sulphur fuel or
abandon the production of diesel products. In fairness to refiners, the
challenge is to do more than lower the sulphur
content. They must simultaneously maintain or enhance the lubricity
factor because a high-compression diesel engine derives much of its internal
lubrication from the fuel as opposed to crank case oil. And if that were
not enough, they have to maintain or improve on what is called the “cetane rating” which describes the temperature at which the
fuel will explode under pressure. The higher the cetane
rating the lower the temperature at which combustion takes place and can be
sustained with the result that the motor runs at a lower temperature improving
mechanical life and avoiding the production of NOx
emissions.
It has been more than three decades
since we built a new refinery in the west with the consequence that a near-term
business case for substantial investment to achieve this triple objective is
unappealing given the age and condition of the balance of the refinery.
Shell has already provided an answer: it is ceasing the production of
diesel at its Bakersfield refinery. I have read, but have
not verified, that this one closure takes 6% of the supply of diesel fuel off
the market. When you consider what a similar disparity between supply and
demand did to electricity prices in the fall of 2000 and spring of 2001, there
is genuine cause for alarm. I leave it to your imagination if other
refineries follow the Shell example.
My pessimism is not shared by the EPA
which continues to predict that most refiners will achieve a timely ability to
produce ultra low-sulfur diesel. The Agency also points to certain
“partial compliance” and “hardship exemptions” which can be granted on a
temporary basis through the end of 2009. What worries me is that the EPA
is currently unable to explain the remarkable and threatening run-up in the
retail price of the current, non-conforming fuel. This trend is national
but, as usual, it is having its most dramatic and depressing impact on the California economy.
Suffice it to say, the issue of acute
non-attainment of federal air quality standards and the status of current
diesel exhausts as the #1 source of urban and rural air emissions did not
occupy the focus of last year’s gubernatorial recall effort. Discovery
came as belated news to Arnold Schwarzenegger along with the realization that June
1, 2006 will
occur on his watch with the amplification of the crisis for off-road usage in
2008 as a reward should he seek and secure an additional term. As he
searched the drawers of Gray Davis’ abandoned desk, Governor Schwarzenegger did
not find a trace of what is termed a “state implementation plan” the formal
document which was to have been submitted to the federal government revealing
the compliance roadmap. A year and a month into its tenure, I am unable
to find evidence that the new Administration has made up for this glaring
defect with the consequence that, on some not so distant day, the Governor may
well have to sit down with whoever occupies the post of Administrator at the
EPA and disclose that come June 1, 2006 California will face a fuel
crisis. My hope is that on that day California’s Governor will be armed with a plan
as well as a plea. A plan that, if given an extension, California___in critical collaboration with
neighboring jurisdictions and the private sector___will
exceed the currently articulated ambitions of the EPA not only with respect to
diesel fuel content but also with respect to cleaning our air.
The plan which I commend to Governor
Schwarzenegger and to you is that we switch our transport fleet to a synthetic
diesel fuel that has zero sulphur, virtually no
aromatics, a cetane rating which is fifty percent
greater than currently achievable at a refinery, and very high lubricity.
This crystal clear, virtually odorless fuel will come from coal.
When I make this assertion in California I am met with disbelief. After
all, isn’t coal the domestic energy resource recently ridiculed by the Los
Angeles Times as “truly the fossil of a fuel.”
Last August Mayor Hahn made headlines with
the announcement that he was ordering the Department of Water and Power to
terminate participation in the Intermountain Power Agency’s Phase Three Project
described by its proponents as a “state of the art coal facility.” His
stated reason was a concern for atmospheric emissions in Utah and a desire to see the Department
re-direct its bid for additional generation to an increased reliance upon renewables.
The Mayor objected to the
construction and deployment of a conventional pulverized coal-fired project
which would have incorporated advanced technology to reduce NOx
and SOx emissions. Carbon dioxide and trace
amounts of lead and mercury would have escaped into the atmosphere.
Herein lies the legitimate objection to the coal
option. But what if it was eliminated by proven technology that would
generate electricity from a coal feedstock with no atmospheric emissions,
period? And what if this same coal-fired facility could produce a
synthetic diesel that, when substituted for the #2 refinery product in any
stationary or mobile compression engine would, without any mechanical
modification, alter that equipment from the #1 remaining source of urban and
rural air pollution into an ultra-low emission unit with tail pipe emissions
more benign than equipment designed or modified to run on compressed natural
gas?
Here is the opportunity the Los
Angeles Times neglected to mention, what Paul Harvey would call “the rest
of the story.” The proposition I wish to advance this morning is that
projects meeting these output criteria for two products in critical short
supply in the West and zero atmospheric emissions could be sited today and in
service within five years. The technology is well proven,
the cost is quantifiable and, in today’s markets for both electricity and
vehicular fuels, that cost can be recovered in the marketplace along with a
profit.
The
quest for an environmentally acceptable use of the fossil of fossil fuels
begins with a distinction long known to engineers but little discussed among
those of us who do not happen to be members of that distinguished
profession. Essentially there are two ways to go after the objectionable
byproducts of electrical generation based on a coal feedstock. The terms
of art are remarkably suggestive: pre- vs. post-combustion.
With
modest and geographically dispersed exceptions, the footprint of the historic
coal based generation industry has been that of post-combustion efforts to
clean up smokestack emissions. As an aside, let me acknowledge that there
are other environmental issues dealing with the impact of residual byproducts
and solid wastes on groundwater, but sufficient for our present purpose is a
focus on atmospheric emissions. An array of
technologies are available to designers of modern pulverized coal facilities
such as the one contemplated at the Intermountain Power Agency. Some,
like low NOx burners, can improve combustion while others, like electric precipitators and selective catalytic
reduction equipment, can capture the great bulk of NOx
and SOx emissions. But this equipment, even in
its sate of the art iterations, cannot prevent carbon dioxide and trace
minerals from escaping into the atmosphere.
If the
goal is to generate electricity using coal as a fuel and at the same time
eliminate atmospheric emissions, the solution is conceptually very
simple: don’t burn coal. Burn instead a fuel, termed “synthesis
gas” from which all of the objectionable trace elements have been removed
pre-combustion. The challenge is to consume the synthesis so completely
that the only matter escaping up the stack is water vapor and carbon
dioxide. At this point the zero emission plant requires only that you
capture and then sequester the stream of carbon dioxide. The water vapor
can be condensed as part of a reclaim effort diminishing the demand upon scarce
water recourses.
Recent attention to coal gasification centers on burning the
synthesis gas in combined cycle array of a primary turbine and a second unit
operating off of stream generated by waste heat. The basis for
this “IGCC technology” was invented on the eve of the First World War and
deployed on a massive scale in South Africa more than twenty years
ago. In North America coal gasification has been a mainstay of the photo/chemistry
industry for more than 20 years. Ironically, the most wide-spread
commercialization of coal gasification employs American technology marketed by
Texaco. Following the merger with Chevron, this technology has been
acquired by GE Energy. At the same time rival products offering claimed
design improvements have attracted investor interest. Witness Conoco/Phillips’ acquisition of the E-Gasifier.
Shell offers a third variant on coal gasification technology.
Beginning in September we have been reading of a major push by GE Energy to
introduce IGCC projects in the mid-west. From Wyoming’s perspective this is essentially a
large dose of “bad news.” The major advantage of deploying pre-combustion
technologies in new mid-western coal plants is their ability to burn local,
high-sulfur coal. Every ton of this coal that becomes usable is likely to
displace a ton of low-sulfur Powder River Basin product. The economics of
switching to the consumption of local coal is rooted in the rail transport
costs that already cloud the future of the historic markets for Powder River Basin coal.
At a
recent technical conference held by the Western Governors’ Conference industry
spokesmen warned that IGCC facilities are likely a decade away from deployment
in the mountain west. There are two reasons the first related to the
properties of low-ranked coals and the second to the environmental Achilles
heel of this technology. ChevronTexaco was
candid that its industry leading gasifier does not
work well with low and mid-rank sub-bituminous coal and so is currently
ill-suited for deployment in the west. Even if this problem could be
solved, there is no economical way to isolate the CO2 emissions
which escape into the atmosphere. This last factor may become critical if
the Western Governors’ Association defines “clean” in the clean coal component
of their energy initiative in terms of power plants that produce a stream of CO2 which can be captured and sequestered.
Fortunately from the perspective of Wyoming’s economic future and our
stewardship over the environment there is a solution, one that builds on the
concept of coal gasification but goes beyond the aspiration to simply burn the
synthesis gas in a turbine. Once you have gasified the coal into a clean
synthesis gas using oxygen, you are more than half way to solving America’s transport fuel and air emission
challenges. If you simply pass the synthesis gas over a catalyst and
create a longer carbon chain molecule, you precipitate a clear, nearly odorless
synthetic substitute for refinery diesel. This fuel contains zero sulphur, produces virtually no aromatics, and has a cetane rating nearly fifty per cent higher than can be
economically attained by refining petroleum. It can also be formulated to
attain a very high lubricity factor. If this fuel is substituted for #2
refinery diesel in any compression engine it will instantly transform a major
source of toxic air contaminants into an ultra-low emission unit. No
mechanical modification of the users equipment is
required and the emission pattern would be more benign than that which is
achievable by the costly replacement or conversion to natural gas. I am a
fan of LNG but it is both fair and factual to point out that many projects are
being designed to utilize what are termed “stranded gas reserves” in the Middle East with the attendant risk to national
security and our armed forces.
Beyond
the national and human security concerns, ponder the financial implications of
switching our heavy transport and transportation fleets to natural gas.
Aside from the small detail that we do not have a delivery system for such an
infrastructure, what school district can afford to replace what are otherwise
perfectly serviceable buses with natural gas propelled units when cleaner air
can be accomplished by a mere liquid fuel substitution, with the infrastructure
for distribution already in place? A similar and utterly unnecessary
economic threat need not be imposed on our beleaguered public transit agencies
to say nothing of California’s farm and ranch economy.
Mayor
Hahn rekindled a debate over what was termed “environmental imperialism” during
my tenure in government. In the 1990’s it centered on California’s ambition to deploy large numbers
of electric cars. Critics conceded that such vehicles worked an
environmental benefit at the point of consumption but contended that this was
off-set by the environmental damage inflicted at the point of production.
Recall Hahn’s concern about the air quality consequences in Utah from another pulverized coal
plant.
Let me take up this vital point in
closing for it is my favorite aspect of the vision. If we sequester the
carbon dioxide emissions from a coal to synthetic fuel and electric generation
facility, we inflict no environmental damage. All trace elements are
recovered in their elemental form. The water vapor is condensed for
further usage and is potable. And, if we can prevail in the race to site
these facilities in Wyoming, the carbon dioxide emissions will be
employed in the tertiary recovery of oil and the release of coal-bed
methane. And like that domestic crude, every barrel of synthetic fuel
produced by what you may envision as a “coal refinery” is oil we do not need to
import in exchange for the greatest drain on America’s balance of payments and, far more
importantly, the lives of our young men and women.
Gentlemen I have now described a set
of problems and the role that I envision for coal in providing a solution to
those problems. Let me conclude by laying this matter on your doorstep
with some thoughts as to what Wyoming must do if it is to attract a coal
to synthetic fuels and electricity industry. Put in a sentence, and
asking for the implausible substitution in your mind of me for Tom Cruise,
“help me help you.” For the foreseeable future I am dedicated to amassing
the coalition of private sector interests to make a business out of producing
electricity for the wholesale market and producing and distributing synthetic
fuels. My goal is not to create a project but to found an industry
limited only by the coal available from the Powder River Basin and the needs of urban and rural
markets for electricity and transport fuels west of Wyoming. But I cannot get beyond
talking unless the project sponsors and industry founders are confident that
there will be adequate transport infrastructure to deliver these
value added products. This means product pipelines originating in
Converse and Natrona Counties in addition to high voltage transmission lines reaching Utah, Nevada, Arizona and California. Infrastructure facilitating
delivery to Colorado is also on my wish list.
The Executive and Legislative
branches of the Wyoming State Government have stolen a march on any other state
in providing for this Authority and augmenting it with the Infrastructure
Authority. But for you to play the role that I envision our elected
representatives will need to amend and enlarge your mandate making it clear
that you are to pursue pipeline facilities capable of moving both gaseous and
distillate products derived from coal. I have discussed this need with
Governor Freudenthal’s office and with Senator Hawks
and Representative Lockhart. I have assured them, and I assure you that
my colleagues and I are committed to Wyoming and this means to working with you
to devise a plan and facilitate its implementation so that there is adequate
confidence in the targets of my efforts that if they respond with an industry
you will achieve a just in time delivery of the critical infrastructure to
access the markets.
-----------------
*Daniel Fessler is Of Counsel to
Holland & Knight LLP, a national law firm with offices in most major west
coast cities. He is also the managing principal of Clear Energy
Solutions, LLC a special purpose entity that works with emerging technologies
and project development. From 1991-96 he was President of the California
Public Utilities Commission.
For further
information contact:
Daniel Wm. Fessler
Clear Energy
Solutions, LLC
Suite 2800
50
California Street
San
Francisco, CA 94111
415-743-6960
daniel.fessler@hklaw.com
or
Clear Energy
Solutions, LLC
Post Office Box
98
Story, WY 82842
307-683-2728
dwfessle@aol.com
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