The American Paper Institute appreciates the opportunity to appear before the House Subcommittee on Energy Conservation and Power to express our views of the American Paper Institute during these oversight hearings on the implementation of the Public Utility Regulatory Policies Act of 1978.

The American Paper Institute (API) is the national trade association of the pulp, paper and paperboard industry. API consists of approximately 175 manufacturers which produce over 90% of the nation's pulp, paper and paperboard.

INTRODUCTION

The pulp and paper industry is the nation's leader in cogeneration and self-generation of electricity, accounting for about 35% of the total installed U.S. cogeneration capacity approximately 7500 megawatts of

electricity. The industry is well suited for use of cogeneration technology since it has both high electrical and thermal demands for energy, easily addressed by cogeneration operations. In the most common cogeneration application in the industry, high pressure steam is

expanded through a turbine to generate electric power. The steam is then extracted or exhausted from the turbine at lower pressures and temperatures to be used for mechanical drives, pulping, bleaching, drying, and space heating.

The industry's use of this low pressure steam, normally condensed in conventional utility generating facilities, makes the paper industry cogeneration process two to three times more energy efficient overall than the steam condensing based electricity generation at utility generating facilities. In addition, the reliability of cogenerated power from paper mills is very high. Since steam is required to operate mills 24 hours per day, 355 to 360 days per year, and proven technologies are used, pulp and paper mills have a cogeneration availability exceeding 90%. This compares quite favorably with the average utility generating unit availability of of about 70-75%. Approximately 44% of the paper industry's own electricity demand is met through its cogeneration operations.

The paper industry is the third largest purchaser of electricity among manufacturing industries in the United States. Its annual bill for purchases of this form of energy exceeds $2 billion. Therefore, it is in the interest of the paper industry for electric utilities to provide an adequate and reliable supply of electricity at the least cost to the ratepayer. This interest, we believe, is shared with all ratepayers.

Cogenerated power has an important role to play in meeting this national objective.

BACKGROUND

The paper industry has cogenerated power and self-generated hydropower since the early 1900s. Potential development of additional cogeneration capacity, however, was stymied prior to enactment of PURPA since many paper companies wishing to sell any electric power, not just cogenerated power to the grid, frequently met opposition from the large utility companies which offered only dump rates for the power.. Pulp and paper companies had little incentive to cogenerate power in excess of their own needs and in some cases had little economic incentive to generate power at all.

In light of institutional and economic constraints, the necessary investment of capital and manpower to modify equipment and industrial processes to expand electric generation operations was difficult to justify.

The enactment of the Public Utility Regulatory Policies Act in 1978 (PURPA) removed many barriers to the growth of industrial cogeneration by freeing industrial industrial cogenerators cogenerators from utility-type regulation, assuring interconnection to the utility grid, requiring utilities to purchase cogenerated power at a fair price and assuring that utilities provide standby and maintenance power at reasonable cost. In enacting

PURPA, Congress recognized the major benefits to society of the 1) greater energy efficiency of cogeneration, 2) increased reliability of the nation's electric generating system, 3) greater use of renewable fuels (such as wood residues, hydropower and municipal waste) generate electricity, and 4) reducing the nation's dependence on imported oil.

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These factors were particularly significant as the price of imported oil escalated in the 1970s. Concurrent with the rise in fuel prices, utilities were experiencing increased costs of environmental protection, high interest rates, construction delays, rapidly increasing equipment costs, financing difficulties and potential fuel shortages. All of these factors combined to cause: 1) a correspondingly sharp increase in utility rates; 2) some service curtailments in parts of the country; and 3) a reawakening of interest in the development of industrial generation of electric power.

The paper industry was very supportive of PURPA and the Federal Energy Regulatory Commission (FERC) regulations establishing the framework för states to implement the law. Unfortunately, litigation in state and federal courts rendered the future of PURPA uncertain and therefore delayed additional development of cogeneration and hydropower by industry.

Shortly after FURPA was enacted, a court in the State of Mississippi found PURPA unconstitutional, but the U.S. Supreme Court in 1982 reversed the Mississippi court's decision and upheld PURPA. ΑΡΙ participated in the case as an amicus curiae, supporting PURPA as constitutional. In 1980, several utilities challenged in federal court the FERC regulations implementing the federal program. API joined FERC in defense of FERC's regulations all the way to the U.S. Supreme Court where they were upheld in May, 1983. This major victory for cogeneration development ended five years of uncertainty over whether the federal program encouraging cogeneration development would stand. These two cases were the beginning of efforts by the electric utility industry to prevent implementation of PURPA.

Despite the major hurdles at the federal level since PURPA's enactment in November, 1978 and other issues arising at the state level, the paper industry has added over 2100 megawatts to its cogeneration capacity. According to API data, the industry increased its electricity production using cogeneration by 26% between 1982 and 1985 and increased its electricity sales to utilities "four-fold in this three-year period. API estimates that the industry in the next five years can increase its cogeneration output by 30%. This estimate assumes that PURPA will remain in effect as written and that there will be no major obstacles to its implementation at the state level.