Report:

An Environmental Disclosure System for New Jersey Committee

December 5, 1997

Executive Summary

This report represents the findings and recommendations, reached by the members of the Environmental Disclosure Subcommittee, on the need for a system of information disclosure regarding the environmental characteristics of the sources of energy that is marketed and sold in New Jersey. The Environmental Disclosure Report also identifies the technical and implementation issues that require further study and evaluation during a recommended "implementation phase" of the system.

In April 1997, the New Jersey Board of Public Utilities (BPU) adopted the report, "Restructuring the Electric Power Industry in New Jersey: Findings and Recommendations" (BPU Final Report). As recommended in the adopted document, a Consumer Protection Task Force was formed, jointly chaired by the BPU, the Office of the Ratepayer Advocate, and the New Jersey Division of Consumer Affairs, to address the need for consumer protections in the deregulated electricity marketplace. The BPU Final Report had endorsed the concept of environmental disclosure to allow customers to compare the environmental impact of energy generated by suppliers. Disclosure would serve the public's right to know and would provide guidelines for those suppliers marketing "clean" energy.

In following the recommendations of the BPU Final Report, the Task Force appointed an Environmental Disclosure Subcommittee, comprised of governmental, consumer, environmental and industry representatives, to address the possible need for the disclosure of environmental information by energy suppliers regarding the generation sources of the power sold in New Jersey. The Subcommittee was charged with working collaboratively to develop specific recommendations on the environmental information that should be made publicly available to consumers, and the need to monitor the potential impacts of electric industry restructuring on the environment.

The goal of the Subcommittee was to recommend a method of environmental disclosure that they believed to be verifiable, financially and practically feasible, and that provided reliable and accurate information to allow energy consumers to make informed choices about the environmental consequences of their power choices. In addition, the majority of the Subcommittee members agreed that information should be collected in a manner that is compatible with the State's possible use of a generation or emissions portfolio standard, if federal or collaborative regional action fails to address adequately the impact of air pollutant transport. Thirdly, all Subcommittee members decided that the the environmental disclosure system should be designed to assist State agencies in tracking the environmental impacts from the restructuring of the electric industry.

The Subcommittee members considered contract-based or settlement tracking systems, tagging-based systems, and hybrid approaches. At the onset of the effort, a list of issues was consensually developed to guide the Subcommittee in analyzing each variation of the known possible disclosure systems. These issues ranged from defining the goal and purpose of environmental disclosure to identifying methods of verifying disclosed information in a reasonable, timely and accurate manner.

Technical issues that the Subcommittee identified for study included the specific emissions and other factors for an effective disclosure system; rating or benchmarking emissions data to enable consumers to compare the environmental composition of the energy purchased; methodologies to be used to calculate and benchmark the environmental composition of energy; ways to compare the environmental information from different air pollutants; need to verify the types of information already compiled and reported, and the availability of additional information; and the most appropriate formats for disclosing information to consumers, other suppliers, and administrators of the program. The Subcommittee also reviewed Federal Trade Commission guidelines and statutes to ensure compatibility of environmental disclosure with existing legislation. Finally, a concerted effort was made to monitor any environmental disclosure initiatives in other states.

By consensus, the Subcommittee narrowed their focus on two proposals that had evolved during the extensive discussions: the NRDC/PSE&G coalition proposal and the Enron/GPUE coalition proposal. The two coalition proposals agree upon certain core elements, and have in common a number of components.

Similarities of the Two Coalition Proposals

The two coalition proposals are similar in the following areas:

1) the basic disclosure requirements for fuel mix and emissions data;

2) the need for uniform, simple disclosure, graphic in format, that allows consumers to understand the information and easily compare environmental claims;

3) the need for benchmarks to allow consumers to compare pollutant emissions disclosed with a norm;

4) the need for an independent program auditor (PA) or system administrator (SA) charged with similar functions and responsibilities; (The SA role is significantly less involved in the Enron/GPUE proposal);

5) similar core data collection by the SA or PA;

6) need for settlement or contract tracking (although the level is divergent for the two proposals);

7) recognized need for flexibility to allow for adaptation to the emerging energy markets, as well as to the actions of other states and the initiatives of federal agencies and institutions;

8) need for periodic review of the disclosure system, and revisions implemented, as deemed necessary;

9) intention to work with other states in the collaboration of a greater regional disclosure system;

10) need for authorizing legislation to allow the BPU (and in respect to some matters also the DEP) to promulgate rules to develop and implement an environmental disclosure system and to assess administrative fees;

11) funding support for the disclosure system through administrative fees paid by retailers selling energy in New Jersey;

12) the need for confidentiality protections (provided that they are implemented in a manner and only to the degree that they do not interfere with auditing functions and the tracking of emissions, as appropriate, back to specific generating units); and

13) the need for objective consumer education provided by the relevant state agencies.

Recommendations of the Environmental Disclosure Subcommittee

These agreed-upon elements provide the framework for the basic direction that the State should take in the development of an environmental disclosure system. Based upon these commonalties between the two coalition proposals that remain under consideration, the Environmental Disclosure Subcommittee recommends the following to the Consumer Protection Task Force for transmittal to the Executive Committee:

1) A disclosure system should be implemented in New Jersey to provide electricity customers with accurate, verifiable, and uniform information about the environmental characteristics of the energy purchased, along with information on cost and contract terms.

2) Consumers should be given the opportunity to make decisions in the deregulated energy marketplace, including the environmental characteristics of the energy they purchase, and energy suppliers have the responsibility to provide a common set of information. Both coalition proposals rest on this basic premise.

3) The development of the environmental disclosure system should be divided into two phases. This initial phase focuses on decision-making for the policy framework. Work in the second phase should recommend the detailed design and implementation steps. During Phase Two, Subcommittee members, including representatives from both coalitions, pledge to collaboratively advise the Board on defining the role of the program or system administrator; determining the implementation cost for both proposals through a Request for Proposal (RFP) process; and evaluating the appropriate level of limitation of the use of either default mechanism.

4) Legislation should be proposed for members of the State Legislature to consider, that at a minimum, authorizes the Board to require disclosure obligations/requirements from all load serving entities (LSEs) doing business in New Jersey. The legislation should allow the Board to assess administrative fees to be paid by the LSEs, based fairly and equitably on their share of the energy market in New Jersey (i.e., per megawatt hour), to create a fund for one or more independent entities to implement and oversee specified aspects of the process of implementing environmental disclosure. The Board, in consultation with the DEP, should be given the responsibility to develop benchmarks based on New Jersey's environmental goals and targets. The Board, and as applicable, the DEP, should be authorized to promulgate rules for implementing disclosure obligations/requirements.

5) State agencies should develop and implement a comprehensive consumer education effort, that includes an environmental education component. Consumer education is essential to both coalition proposals. All parties agree that the relevant State agencies should collaborate to develop an information packet of unbiased information explaining the concept of environmental disclosure and the air quality problems underlying this action. Input will be sought from the public in the drafting of this packet. The development of the informational materials will be initiated as soon as possible, and will be coordinated with the consumer education effort.

6) The mission statement and the list of issues that predicated the development of the environmental disclosure proposals contained in this report were collaboratively developed and agreed upon by a majority of the Subcommittee members. These were presented in the Introduction section of this report.

7) Both proposals call for the creation of a program auditor (PA) or system administrator (SA) responsible for verifying audits of the accuracy of the information disclosed by the LSEs. Both also call for support from the PJM ISO. The PA or SA would obtain relevant data from the EPA and the EIA and obtain from the PJM ISO the energy transaction data.

8) Subcommittee members agree that the cost of the auditor/administrator's functions should be paid through a fee assessed on the LSEs doing business in the State, fairly allocated based on energy (megawatts per hour) sold. Although the role and responsibilities for the auditor or system administrator have not yet been fully defined for either proposal, it appears that similar core data collection is required in either case.

9) Subcommittee members agree on the need for strict adherence to confidentiality requirements for all transaction data consistent with the need for auditing, including pro-rated unit-specific emissions disclosure for environmental claims. It might be necessary to have a contractual agreement between the PJM ISO and the independent auditor. PSE&G and ENRON have agreed to work together to more comprehensively define the role of the administrator in data collection and the auditing function. This joint project, to be completed during the implementation phase, could be the basis for a Request for Proposals (RFP) to initiate a contract for the creation of a PA.

10) Both proposals agree that, initially, emissions of three specific air contaminants should be disclosed on customers' bills, as well as in contract and marketing materials: sulfur dioxide (SO2), carbon dioxide (CO2), and oxides of nitrogen (NOx).

11) The environmental component of disclosure should include percentages of fuel mix (i.e., coal, oil, etc.).

12) The fuel source categories that should be disclosed are: oil, gas, nuclear, coal, hydroelectric, solar, wind and biomass. Subcommittee members agree that pumped hydro storage should not be included in the hydro category.

13) Environmental disclosure should rest on the principle of comparability of information, that is, allow all consumers to read and easily compare environmental characteristics.

14) A process for periodic review of disclosure requirements should be implemented to allow for the possible revision of the types of information needed. It might be necessary in the future, as data on other pollutants becomes available and/or in response to research on health effects or to federal directives, to include disclosure of emissions information for additional pollutants, such as particulate matter. The specific review process, including determination criteria and the frequency of review, should be determined during the implementation phase.

15) A benchmark should be developed for each air pollutant emission disclosed. The benchmark would be a guide to help customers compare a supplier's emission level to a norm. The recommended benchmark might be a New Jersey clean air target or State emission average. The benchmark should be determined during the implementation phase.

16) The methodology used to calculate the emissions disclosed should reflect emissions per unit of energy output (pounds per kilowatt hour). The Subcommittee recommends that the specific methodology should be determined during the implementation phase. Subcommittee members also recommend that the depiction of emissions should be uniform among all suppliers' materials, graphic in nature, and simple. The specific type of depiction will be addressed during the implementation phase.

17) Customers should be informed that the information given reflects the generation for which they are paying, not necessarily the characteristics of the electrons that the customer is actually receiving. Whenever regional average or "high emissions" default mechanisms are used, this should be clearly indicated and these disclaimers should reflect Federal Trade Commission (FTC) requirements.

18) All claims must be consistent with FTC requirements.

19) With the Executive Committee's consent and under its direction, both coalitions agree to work together during the implementation phase to define the role of the system or program auditor and to determine the cost of implementation through the RFP process.

Recommendations for Phase Two - Development of Environmental Disclosure System

This report also identifies a number of issues and actions that need to be addressed during the second phase in the development of an environmental disclosure system. The Subcommittee recommends that the following work should be pursued during Phase Two:

1) Evaluation of the specific emissions and fuel mix default mechanisms recommended in both coalition proposals, including the "high emissions" default in the NRDC/PSE&G coalition proposal and the "residual system average" advocated by the Enron/GPUE coalition proposal.

2) Determination of the appropriate level of limitation in the use of either default mechanism in both the short-term, transitional period and in the long term.

3) Coordination between New Jersey state agencies and other states, particularly those states located in the PJM region, in an effort to develop a regional system for environmental disclosure.

4) Development of recommendations for the distribution of disclosure information, including the determination of who should receive the information, when, and in what types of venue (i.e., bills, marketing materials, contracts).

5) Development of recommendations for methods of calculations; frequency for updating disclosure information; and the margin of error that should be allowed (i.e., the precision of the disclosure data.

6) Development of process recommendations for handling new products and suppliers (for example, prospective disclosure).

7) Development of procedural recommendations for addressing emissions and fuel mix information for power produced outside the PJM region.

8) Development of recommendations for definitions for biomass and innovative technology (the EPA definitions will be the starting point for discussion.

9) Evaluation of specific procedures for measuring support of energy efficiency (i.e., demand-side management); benchmarking such support; and formats for disclosing such support;

10) Development of recommendations on who should serve as auditor or administrator of the disclosure system and this entity's precise responsibilities for data collection, verification and auditing function; calculation of commonly available data elements.

11) Development of recommendations for the computation and/or the specific information/data that the auditor/administrator will need to collect, track, verify, and calculate.

12) Development of recommendations for the graphic depiction of environmental information (the New England label will be used as the starting point for discussion) (Appendix III).

13) Development of recommendations for the required categories to be used in reporting fuel mix and the criteria for determining when a separate category should be created.

14) Development of recommendations for the specific information that will be needed from EIA, EPA, PJM ISO, retailers selling energy in New Jersey and other regional ISOs.

15) The development of recommendations on how customers should be provided with environmental information, and the timing of disclosure, should be developed during the implementation phase. Subcommittee members agree that in any solicitation, the environmental information should be provided to the customer upfront, before the contract is signed. Furthermore, it is agreed that it is not necessary for all environmental information to be included in every piece of material. It is probably not necessary to have the identical information in marketing material and in bills, but disclosure in different media's should be consistent. The specific guidelines for how often the disclosure information needs to be updated should also be developed during the implementation phase.

Unresolved Issues

The primary area of difference in the two coalition proposals is the default values that would be reported, when a LSE elects not to make an affirmative claim as to the environmental characteristics of the power offered/provided. The ENRON/GPUE proposal would allow the default value to be a regional average for both fuel mix and emissions, from which affirmative claims contracts have been netted out. The NRDC/PSE&G proposal would require the default to be a high emissions scenario: the emissions reported would be a high emissions average that would be defined during the implementation stage.

The NRDC/PSE&G coalition is designed to provide incentives for retailer marketers to disclose specific environmental information. The Enron/GPUE coalition proposal is designed to encourage retail suppliers to develop and market cleaner generation products and renewables while reducing the administrative burden by having retailers disclose information that would be subject to verification and legal liability.

The next phase in the development of an environmental disclosure system should include evaluation of the specific emissions and fuel mix default mechanisms recommended in both coalition proposals, including the "high emissions" default in the NRDC/PSE&G coalition proposal and the "residual system average" advocated by the Enron/GPUE coalition proposal.

A related area of difference (depending on how the program is implemented) is the degree to which the disclosure system would reveal unit-specific information. Under the ENRON/GPUE approach, such information would be provided only for units for which an affirmative (clean energy) claim is made. In contrast, the NRDC/PSE&G proposal includes strong incentives, and potential limitations on the use of the default mechanism, that would encourage the LSE to make specific affirmative claims and would require unit-specific information to be provided at least for all generation units served by the PJM ISO.

Another issue that remains unresolved within the Subcommittee is that of the inclusion of energy efficiency in the disclosure label. Energy efficiency is at the top of the hierarchy of methods for addressing pollution. Although a number of Subcommittee members recommended that support of energy efficiency be one of the elements rated on the environmental disclosure label, no consensus was reached and the issue will be revisited during the next phase in the development of an environmental disclosure system in New Jersey.

Introduction

On April 30, 1997, the New Jersey Board of Public Utilities (BPU) adopted the report, "Restructuring the Electric Power Industry in New Jersey: Findings and Recommendations" (referred to herein as the "BPU Final Report") under Docket No. EX94120585Y. The BPU Final Report is a blueprint for introducing competition into New Jersey's retail electricity marketplace, beginning in October 1998.

The introduction of competition offers potentially significant economic benefits, not only to New Jersey's residents, but to the State's overall economy. However, consumers may need new protections to ensure their welfare is safeguarded in the new deregulated marketplace. As the BPU Final Report on electric restructuring emphasizes, it remains the State's responsibility to provide ongoing, comprehensive consumer protection in the competitive marketplace. In fact, due to the importance of customer access to safe, environmentally sound, and reliable energy sources and services, consumer protections beyond those typical of other non-regulated industries may be necessary.

To address the myriad of concerns related to consumer protection in the deregulated energy market, the electric industry restructuring report recommended the formation of a Consumer Protection Task Force. The Task Force, jointly chaired by the BPU, the Office of the Ratepayer Advocate and the Division of Consumer Affairs, was entrusted with the responsibility of working with consumer and industry stakeholders to develop specific recommendations to present to the BPU for further action.

The Task Force was charged with three major tasks:

1) reviewing existing consumer protection laws to develop recommendations to protect against fraudulent activity; 2) developing recommendations for a comprehensive consumer education program; and 3) developing recommendations for the disclosure of environmental information by power suppliers regarding the sources of power sold in New Jersey. To address these distinct areas, three subcommittees were formed: the Consumer Protection Subcommittee, the Consumer Education Subcommittee, and the Environmental Disclosure Subcommittee. Each subcommittee is responsible for submitting its recommendations to the Task Force by December 1997. After consideration of the findings of the three subcommittees, the Consumer Protection Task Force is to formally submit final recommendations to the Executive Committee.

This report represents the work of the Environmental Disclosure Subcommittee. The discussion, findings and recommendations presented in this report are a result of a collaborative public/private partnership. While the goal of the Environmental Disclosure Subcommittee was to recommend the environmental information which should be made publicly available, a concern of the Subcommittee was the potential environmental impacts of electric industry restructuring raised in the BPU Final Report.

The Environmental Disclosure Subcommittee included representatives from the State's utilities, independent power producers, power marketers, environmentalists, consumer groups, energy service companies, business and industry trade groups, as well as staff from the BPU, Office of Ratepayer Advocate, New Jersey Department of Environmental Protection (DEP), Division of Consumer Affairs (DCA), and the Department of Commerce (see attached listing for names and affiliations). Members of the Subcommittee were nominated by the organizations and groups they represent. Representatives were responsible for not only presenting the concerns and viewpoints of their constituents to the Subcommittee, but keeping their memberships informed of the progress and general direction of the discussion, as well as possible recommendations and solutions.

The Subcommittee met weekly from the beginning of May through October 1997, to consider what information a consumer would want and/or need to make informed choice when selecting his or her energy supplier. Throughout that time, a number of representatives of the energy industry and consumer and environmental groups generously lent their time and expertise in helping the Subcommittee members to understand the future structure of the marketplace, as well as to identify alternate methods that could be employed to carry out environmental disclosure (see attached list of presentations).

The Subcommittee's findings take into account the environmental impacts of the energy's source; what type of tracking system would be necessary to verify the environmental information disclosed; and what information is necessary for State agencies to be able to monitor the environmental impacts of electric industry restructuring and to take action, if necessary, to protect the State against undue adverse environmental impacts.

Background

Although New Jersey strongly supports the introduction of competition in the wholesale power market, and is pursuing the introduction of competition in the State's retail energy market, concerns have been raised regarding potential long-term, adverse environmental impacts from open access. The BPU Final Report affirms BPU's belief that a combination of actions by the United States Environmental Protection Agency (EPA) and possibly by the Federal Energy Regulatory Commission (FERC), along with collaborative state efforts, notably efforts of the Ozone Transport Advisory Group (OTAG), could effectively safeguard against the potential adverse environmental impacts resulting from open transmission access. The BPU Final Report recognizes that such combined action would better serve New Jersey's interests than unilateral State actions, and advocates giving a reasonable opportunity for such measures to reduce NOx emissions in upwind states. However, the BPU Final Report also recommends developing a State contingency action plan, if federal or regional action fails to adequately act by the time retail competition is set to begin, to mitigate the adverse environmental impacts that could result from electricity restructuring. It adds that as part of developing such a contingency plan the BPU, together with DEP, would explore the establishment of emission portfolio standards applicable to all retail suppliers in the State.

The Environmental Disclosure Subcommittee agreed that, at least initially, the focus should be on three pollutants: oxides of nitrogen (NOx), sulfur dioxide (SO2), and carbon dioxide (CO2) emissions. Their reasons for this focus are as follows: 1) the release of these emissions from fossil-fueled power plants at significant levels; 2) the serious health and environmental impacts associated with these emissions; 3) initiatives and directives on the federal level to reduce these pollutants; 4) the existing availability of data specific to these emissions; and 5) the propensity for these emissions to be transported and affect areas distant from the site of generation.

NOx is a precursor to the formation of ground-level ozone. The entire State of New Jersey is in nonattainment for the national health standard for ozone, with the degree of nonattainment being ranked as "severe" in most counties. Ground-level ozone can aggravate acute respiratory illnesses, trigger asthma attacks, cause coughing, wheezing and shortness of breath, and can lead to permanent lung damage. BPU's concern about the potential impact of electric industry restructuring on the State's environment is based on evidence that atmospherically transported NOx and other emissions generated by power generating facilities located upwind of New Jersey have an impact upon State air quality. If consumers through their choices in the new open competitive electric market cause a shift of more power production to higher-emitting upwind units, the open market will in fact exacerbate New Jersey's already severe level of ozone pollution.

The EPA estimates that NOx emissions generated from electric power plants in the eastern half of the country were approximately three-million tons during the 1990 summer ozone season. Although both the Clean Air Act Amendments of 1990 (CAAA) and the Memorandum of Understanding entered into by the northeastern states are expected to produce significant reductions in NOx produced by the power generating sector, EPA believes that NOx produced during the ozone season will need to be further reduced to below one-million tons to prevent violations of the federal ozone standard in areas such as New Jersey.

Utilizing the recommendations developed by Ozone Transport Assessment Group (OTAG), the EPA issued on October 10, 1997, a proposal that would require reductions of NOx emissions in 22 states in order to address the impacts of transported pollutants. The BPU and the DEP intend to monitor the progress of this EPA initiative, and any other federal and regional efforts that emerge, to evaluate whether they adequately address the importation of NOx and other transported pollutants. Because the BPU believes federal action is the most efficient and effective strategy to address the transport issue, the BPU Final Report advocates giving existing and proposed federal measures a reasonable opportunity to successfully mitigate any increases in emissions in downwind states. If, however, the existing regional and federal attempts at addressing these issues fail, the BPU Final Report concluded that state contingency action should be considered, including the possible assessment of a state standard. Accordingly, state agencies agreed to closely monitor research findings, including environmental modeling analysis completed by the OTAG.

In addition to NOx, SO2 and CO2 are also released from fossil-fuel burning power plants and have an impact upon the environment. Although New Jersey is currently in attainment with the health standards for NOx and SO2, SO2 emissions contribute to acid rain when they are chemically transformed in the atmosphere into sulfuric acid which, along with nitric acid from NOx, returns to earth as wet deposition such as rain, fog or snow, or as dry deposition such as fine particles or gases. Acid deposition damages lakes and harms forests and buildings. The Acid Deposition Standard Feasibility Study, which was requested by Congress from the EPA in the CAAA, cites the need to protect against ecological effects in aquatic systems.

The effects from SO2 may result from both chronic and acute episodic acidification, including snowmelt and storm runoff. The latter effects are more common and are of substantial concern in that they tend to occur in the most biologically significant time of the year. Up to 18,156 lakes in the eastern U.S. are potentially impacted. Terrestrial ecosystems, such as high elevation red spruce forests may also be at risk, but less is known about the effects process, and the rate and extent of impacts on those resources. Human health impacts from SO2 emissions occur chiefly due to SO2's role as a precursor to sulfate aerosols, which are associated with premature deaths and chronic bronchitis, as noted in the Human Health Benefits Study called for under the CAAA and prepared for the EPA Acid Rain Division.

CO2 is the main focus of developing global efforts to reduce greenhouse gas emissions. According to the International Panel on Climate Change, the balance of evidence suggests that CO2 has a discernible human influence on global climate. This influence is the result of increased emissions of greenhouse gases. Predicted changes in climate resulting from continued emissions of these gases include rising sea levels and associated increased damages from storms which, if actually experienced, can seriously impact New Jersey.

Conclusions of the Ozone Transport Assessment Group

After two years of research and modeling, OTAG recently published an Executive Report of its findings and conclusions. Among the major conclusions reached by OTAG are:

* Regional NOx reductions are effective in producing ozone benefits; the more NOx reduced, the greater the benefit.

* Ozone benefits are greatest in the subregions where emissions reductions are made; the benefits decrease with distance.

* Both elevated (from tall stacks) and low-level NOx reductions are effective.

* VOC controls are effective in reducing ozone locally and are most advantageous to urban nonattainment areas.

* Air quality data indicate that ozone is pervasive, that ozone is transported, and that ozone aloft is carried over and transported from one day to the next.

* The range of transport is generally longer in the North than in the South.

The Air Quality Analysis Workgroup (the "Workgroup") found that ozone transport does occur in the OTAG domain on local, subregional and regional scales. Local transport in the 30 to 150 mile range likely contributes most to ozone nonattainment. Subregional transport occurs over the 100 to 300 mile range, and regional transport can occur over the 300 to 500 mile range, often including significant transport via nocturnal jets aloft. Although it was evident that longer transport distances resulted in lower contributions to ozone levels in troubled areas, the analysis indicated that the transport of ozone plays a role in exacerbating problems existing in most areas that are currently nonattainment for ozone.

Based upon the conclusions reached by OTAG, consensus recommendations were adopted by OTAG to reduce ozone transport. They include:

* The need for additional modeling and analysis as the states develop their specific control strategies.

* Ranges of utility and nonutility NOx control levels for implementation in much of the OTAG region.

* Support for Ozone Action Days programs to increase public awareness of ozone.

Support for establishment of NOx emissions market systems to reduce the cost of compliance.

The Workgroup also found that the perceived contribution of ozone transport is strongly dependent on how the ozone "problem" is defined. Local emissions are more important with respect to peak one hour concentrations than with respect to lower concentration thresholds and concentrations assessed over longer averaging times (eight hour or seasonal averages), where larger areas and longer distance scales become more important. The modeling indicated that implementation of the Clean Air Act over the past 15 years has generated a significant decline in the number of exceedances of the one hour (120 pp.) standard, indicating that historical control strategies have had some effectiveness in reducing peak concentrations of ozone. While only a few major urban areas exceed the 1 hour standard several times per year, ozone nonattainment still exists across much of the domain. When the new, longer eight-hour averaging times are considered, the spatial extent of potential nonattainment increases substantially, and the rate of historical improvement is less pronounced.

Recent Federal Action

In July 1997, responding to studies indicating that exposure to ozone levels of half the 0.12 ppm standard can cause significant health problems, the EPA adopted a more stringent ozone health standard of 0.08 ppm averaged over eight hours. At the newly adopted standard, New Jersey would have exceeded the limit for ozone on 33 days in 1996. Any additional transported NOx from upwind generation as a consequence of restructuring the electric industry could exacerbate New Jersey's ozone problem with the likely imposition of more stringent attainment measures and the associated costs.

On October 10, 1997, relying upon the technical analysis completed by OTAG, the EPA formally announced a strategy to address the transport of NOx. This strategy was set forth in a rule proposal (hereafter referred to as the "Ozone Transport SIP Call") that identifies 22 states and the District of Columbia as being significant contributors to downwind ozone problems in neighboring states. The strategy embodied in the rule requires affected states to reduce their NOx emissions by specific amounts. The rule advises that the most cost-effective way for the states to meet the required NOx reductions is to focus on utility plants and large industrial boilers. However, the proposal allows the affected states full flexibility to choose how the required reductions will be met and to pursue either utility reductions or alternative measures to reduce those emissions that result in the production of ground-level ozone.

The EPA will take public comment on the proposed rule for at least 120 days from October 1997, with additional time allowed for technical comment. It is expected that in September 1998, the EPA will issue a final rule on the required regional

reductions of NOx. By September 1999, each of the affected states and the District of Columbia will be required to submit a revised State Implementation Plan (SIP) to the EPA outlining how that state will reach its revised NOx budget. As previously indicated, the affected states will have flexibility to decide which sources will be required to reduce NOx. In September 2002, the affected states will be required to implement the controls outlined in the EPA-approved SIPs.

The Environmental Disclosure Subcommittee agrees with the position taken in the BPU final report: federal and/or regional action is the most efficient and effective approach in addressing the pollution transport issue, as well as ensuring a level, competitive field in the emerging competitive electric industry. Therefore, the recent actions of EPA to address the transport of NOx are encouraging. These actions, together with the measures being implemented under existing provisions of the CAAA and the Northeast Ozone Transport Commission's Memorandum of Understanding (OTC MOU) should help address the transport of emissions.

It is important to recognize, however, that the proposed timeline for some of these actions may be a number of years into the future. As with any proposed rulemaking action, regulatory inertia, court challenges, congressional action and revisions in response to stakeholders' concerns could delay and alter the outcome of the rule making and its implementation. Although Section 126 of the CAAA allows states that are unable to meet the health standard for ozone due to transported emissions to file petitions with EPA requesting it to require upwind states to reduce emissions to allow the downwind state to achieve attainment with the standard, there is no guarantee that such action will be taken. In August 1997, eight northeastern states filed such a petition which is currently subject to prosecution under Section 126. However, it is currently unclear whether these actions will remain enmeshed in legal procedures indefinitely, or whether they will provide an impetus for more timely action. Therefore, it is prudent for the State to continue to consider a contingency plan should such an action prove warranted.

In addition to federal and regional regulatory controls and State contingency plans, a third dynamic could contribute to the solution of pollution transport problems. In a competitive energy market, new opportunities will emerge for markets to develop products that will be attractive to customers and that will encourage them to opt to purchase power generated by cleaner generating sources. The Environmental Disclosure Subcommittee sees the information provided to consumers as a tool which, if properly designed and used, may help shape the new energy marketplace, and may in itself contribute significantly to the development of cleaner generating resources and to the improvement of regional air quality.

Toward this end (i.e., the design of an effective environmental disclosure process), the Environmental Disclosure Subcommittee collaboratively agreed to the following mission statement and developed the list of issues given below to guide its discussion. The findings and recommendations of the Environmental Disclosure Subcommittee are based on the principles that comprise the "Goals and Purpose Statement".

The Goals and Purpose Statement for the Consumer Protection Task Force's Subcommittee on Environmental Disclosure

The goal of this report is to recommend a method of environmental disclosure that is verifiable and both financially and practically feasible and has the following features:

1. Provides reliable and accurate information to enable customers to make informed choices about the environmental consequences of their power choices;

2. Collects information in a way that is compatible with a emission portfolio standard and other steps that may be part of the State's contingency plan which may have to be developed to address the impact of air pollutant transport on New Jersey's ambient air quality, in the event that regional or federal measures do not adequately address this issue, as described in the BPU's final restructuring report;

3. Helps state agencies track the environmental impacts of restructuring the electric industry.

By providing information which can both directly inform the consumer and which can also serve as the basis for the environmental portion of the consumer education effort, disclosure is intended to help New Jersey achieve compliance with the National Ambient Air Quality Standards, reduce air pollution that is aggravated by transport of pollutants from upwind states, reduce the consumption of finite natural resources, and limit the emissions of greenhouse gases.

LIST OF ISSUES

The BPU Final Report on electric industry restructuring concluded that consumers would benefit from a requirement that all electricity suppliers participating in the competitive retail market place in New Jersey disclose information which will reveal the environmental composition of their power source(s). The Environmental Disclosure Subcommittee considered alternative methods by which this might be done.

The Subcommittee developed recommendations for how consumers could be provided with the information necessary to choose suppliers whose sources of power are ones that are less environmentally intrusive, including those providing power from low-emitting generators or renewable resources.

Vital to the design of an information disclosure system that if both feasible to be implemented and provides information to consumers effectively is the resolution of several technical issues. Successfully addressing these issues is essential to ensuring that the information provided to consumers is meaningful and useful and, perhaps most important, can be reasonably verified to prevent consumer fraud. These issues include:

1. What is the goal and purpose of environmental disclosure?

2. Which specific emissions and what other factors should be included in environmental disclosure?

3. Should disclosed information as to environmental composition be rated or benchmarked to provide the consumer with context, comparative information or guidance as to relative value?

4. What methodology should be used to disclose, benchmark and/or rate the environmental composition of power supplied to a customer?

5. How should different air pollutants and other environmental consequences of power generation be compared to each other, if at all, in the disclosure, benchmarking or rating process?

6. What types of emissions and other environmental information is readily available from existing mechanisms? What additional information is needed and would it require new mechanisms to generate the information?

7. How can emission disclosures or ratings claims by suppliers be verified in a reasonable and timely manner and with a high degree of confidence?

8. How and in what format should information as to the relative environmental composition of the portfolio of various power suppliers be communicated to other suppliers, consumers or the public?

The Environmental Disclosure Subcommittee as its primary mission, examined these and other relevant questions in its development of recommendations to the Consumer Protection Task Force as to what type of environmental disclosure system would be feasible and effective in a competitive retail electricity marketplace. As it did so, the Subcommittee also took into consideration environmental disclosure systems being developed in other states.

In addition, the Subcommittee endeavored to review existing and proposed state and/or federal (for example, Federal Trade Commission) "green marketing" guidelines or statutes to ascertain the compatibility of the Subcommittee's recommendations with these other initiatives.

Summaries of Initial Proposals

At each weekly meeting, beginning July 1, 1997 through October, the Subcommittee members have analyzed the merits and shortfalls of specific environmental disclosure systems that are under development. Initially, particular attention was given to views of the New England Disclosure Project which was then aiming to develop uniform consumer disclosure standards for New England being developed for recommendation to the New England Utility Regulatory Commissions. This initiative was coordinated by the Regulatory Assistance Project (RAP).

The attention of the Subcommittee did not remain focused solely on the RAP initiative. Over the course of the months of meetings, a number of experienced authorities on environmental disclosure systems were invited to share their expertise with the Subcommittee. Presentations were made by Tom Austin from the Regulatory Assistance Project (RAP); Michael Bradley of Michael Bradley Associates; Max Duckworth of the Tellus Institute; Nathanael Greene, representing the Natural Resources Defense Council; Suzanne Daycock, of Odyssey Strategies, representing the Mid-Atlantic Power Supply Association (MAPSA); Ken Laughlin and Michael Kormos from the PJM Interconnection; David Raskin, Esq. of the law offices of Steptoe & Johnson; and Malcolm Jacobson, the Director of Government Affairs, Enron Corp.

Proposals for environmental disclosure systems considered by the Subcommittee included both contract-based or settlement tracking systems and tagging-based systems, as well as hybrid approaches, such as RAP's proposal. In the initial strict contract-based or settlement tracking system considered, all retailers selling energy in New Jersey would be required to disclose information on resource mix and emissions specific to the generating units which are determined to have provided energy sold in the State. The tracking and verification necessary to ensure accuracy of the environmental information would "follow the dollars" of the contract paths. Each seller would be required to show how he met his hourly demand, whether through power from his own power plants, contracts for supplies from others, purchases from the spot market, or combination of all three. The basic building blocks of existing contract settlement processes, using established methods for measuring generation, demand and contract rights, would be adapted to provide the basis for contract-based disclosure.

In the tag-based system, for every 1,000,000 Kilowatt-hour (kWh), or other designated unit of measurement, a tag would be produced. The tag would represent selected characteristics of the particular generation source (i.e., fuel type, emissions, location). Every unit of power sold in the retail market would have a tag. However, tags and the actual power sold would be considered separate "commodities" and could be traded separately. The tags could be traded just as any other commodity at a price determined by the forces of supply and demand. Retailers would be required to have sufficient tags to cover all of their final sales to customers. For instance, if a retailer is selling 100 mWh of energy that is marketed as being produced from renewable technology, then the retailer would not have to provide energy produced from renewable fuels, but would instead have to hold 100 mWh's worth of renewable tags. Since each tag would have a serial number, a program of tradable tags could be tracked through a computer database.

The Subcommittee members considered both contract-based and tagging-based disclosure systems. The following are concise summaries of the environmental disclosure systems studied that were presented to the Subcommittee members. The complete proposals are attached as Appendix I (NRDC/PSE&G Coalition Proposal) and Appendix II (Enron/ GPUE Coalition Proposal).

Enron Corp. July 1997

"A Resource Labeling System for Electric Power Consumers" Preliminary Draft

Enron's initial draft model assumed a regional or national market in which resource disclosure is likely to be required for all suppliers. The goal of the proposal was to give consumers access to information and provide a mechanism to translate purchasing criteria into transparent pricing signals to drive suppliers to develop generation sources preferred by consumers. The proposal supported a tradable tag system in place of transaction or contract tracking. It proposed a "Power Facts" resource disclosure label of quantitative, factual data. The label includes information on both fuel sources and emissions for CO2, SO2, and NOx.

For suppliers that make no claim, Enron proposed a single "default label" reflecting characteristics of generation sources that typically serve the region. A designated regional administrator is charged with compiling the necessary data to calculate the default label which would be updated periodically. The default label is adjusted to exclude power sold under specific marketing claims.

For suppliers that make an affirmative claim with respect to resource characteristics, Enron proposed that the supplier must disclose the appropriate fuel mix and emissions in the same format as the default label. The supplier is responsible for documenting the claim.

Enron proposed a tradable tag mechanism, called "Green Tags". This tag is a repository of the value associated with the characteristics of a specific generation source. It is denominated in units of one million kilowatt-hours (kWh) and is created at the generation source when the power is produced. Tags could signify fuel type, location, relative emissions or other characteristics of the particular generation source. These tags, once created, could be bought and sold independently from the actual energy.

Rationale: This tagging-based proposal employed market forces to allow customers to direct money towards specific "cleaner" sources. It is designed to encourage generation from desired sources. It avoids the need to track transactions and does not require an overhaul of existing market systems.

Regulatory Assistance Project (RAP) August 28, 1997

"Uniform Disclosure Standards for New England:
A Draft Report and Recommendations to the New England Utility Regulatory Commissions" Draft

The RAP environmental disclosure goals focused on allowing customers to make choices, enhancing customer protection and making the electricity market more efficient. The vehicle is a basic uniform label which includes fuel mix and emissions for CO2, SO2, and NOx.

RAP recommended a hybrid system relying on settlement tracking and the use of tags, which could be traded only with a corresponding energy transaction through the power exchange. The labeling of imported power would depend on how tracking takes place in neighboring regions. Disclosure would describe product, not company generation attributes, and would rely on historical data. Product labels would be widely available, in monthly bills, in written advertising, in direct mail marketing materials, in telemarketing, over the Internet and in contracts. In addition, RAP recommended that all consumer information be provided in a single document entitled "Terms of Service".

Rationale: Consumer information should be widely available. Product information is more relevant to consumers than company information. The system should avoid the potential for gaming and consumer misunderstanding.

The disclosure mechanism should be carefully crafted, but RAP maintains that legal hurdles for environmental disclosure are not insurmountable. The proposal suggests that the Independent System Operator (ISO) could serve as administrator. The administrator, after determining the cost of tracking and verifying disclosure, could decide whether this function is better performed in-house or by a private contractor.

Rationale: All consumer information should be available in one place. It should be obtained as directly and efficiently as possible.

RAP recommends that proposed model rules should be adopted by each state commission; labeling and disclosure requirements should be established as a condition of a retail seller's license, and compliance failure should result in sanctions and penalties.

Rationale: Disclosure should be uniform where possible. Non-compliance should carry penalties.

Green Mountain Energy Resources

Claims-Based Approach to Information Disclosure

The goal of Green Mountain Energy Resources' (GMER) proposal goal is "to provide a reasonable method by which retail consumers of electricity can receive meaningful, accurate and verifiable information about the electricity that they purchase without unnecessarily or prematurely imposing regulations upon the market that would inhibit the development of a robust competitive environment."

GMER proposed that every residential customer be provided with simple uniform regional data on average aggregate emissions performance and/or fuel characteristics of the regional power pool in lieu of requiring retail marketers to disclose environmental information specific to the power they sell. The state would regularly provide customers with objective and comprehensive educational materials.

Rationale: This provision will protect customers from subjective marketing approaches.

GMER proposed that retail suppliers be permitted to offer special "products" to customers provided that they can assure customers and regulators that they can verify their delivery of the product under the terms of the marketing "claim". Under the proposal, if a supplier was selling a product for which it made a claim and has specifically procured energy for delivery under that claim, the supplier would be required to notify the ISO of the existence of that contract. The ISO, in turn, would deduct the energy produced and delivered under contract from the aggregate, pool-wide emissions or fuel characteristics system average that would be provided to customers for non-claim energy purchases.

The GMER proposal would allow marketers to sign system contracts with generators (for power provided from any of the generator units) and attach to that power the environmental characteristics of one specific generating unit. GMER points out that this approach would be largely self-policing, with the BPU conducting spot audits (similar to those conducted by the IRS) of suppliers' product claims. The BPU would gain this authority as a supplier licensing requirement. If a supplier is found to have failed to provide acceptable verification, the BPU could suspend or revoke a supplier's license (subject to appeal) or the State's Attorney General could seek to prosecute under the Federal Trade Commission Act.

Rationale: "....GMER's proposal requires only those retail electric providers making claims about the fuel mix or emissions characteristics of their power supply to disclose their specific generating resources and emissions. Those retail suppliers who make no claims about their fuel mix would disclose the residual, or net, mix of the generating resources in the Pennsylvania-Jersey-Maryland Power Pool. The ISO would calculate this residual mix by subtracting generation within the region tied to specific claims from the total generation in the region."

Natural Resources Defense Council (NRDC), September 5, 1997 "Implementing Environmental Disclosure in Conjunction with Emissions Performance and Renewable Portfolio Standards"

NRDC points out that a system of disclosure can be a means to implement and enforce emissions performance standards (EPS) and renewable portfolio standards (RPS). States can use an EPS to establish a more level playing field for all in-state and out-of-state power providers by requiring that all companies providing retail electric service in the state meet minimum environmental standards.

The original NRDC proposal identified the basic disclosure requirements at retail and wholesale level. All retail marketers would be required to disclose the average fuel mix and emission rates for CO2, SO2, and NOx specific to each retail product it sold, regardless of whether any affirmative environmental claim is made. The marketer would ensure that the weighted average of all its retail products equaled the average of its wholesale portfolio.

Rationale: For companies selling retail products in more than one state, it is important to limit the ability to artificially "carve out" relatively clean products for New Jersey customers and sell the residual dirty power in other markets that do not have environmental disclosure or retail choice. Mandatory disclosure provides information to consumers about all electricity products and allows them to avoid the dirtiest products as well as to choose the cleanest ones.

In addition, the original proposal recommended that the state should prohibit marketers from breaking down the components of their wholesale portfolios beyond the level that can be verified. Reporting would include the fuel mix and emissions data for each of the components of the wholesale portfolio, including any combination of self-generated and purchased power. Information to be disclosed should include fuel resource mix, including oil, gas, coal, nuclear, hydro, solar, wind, biomass, waste, other or other renewable. Only resources that comprise two percent or less of the mix could be included in "other". The burden of proof for claims should rest with the generating companies. Toxic and other emissions could be tracked and reported when they can be tracked accurately and readily.

The NRDC proposal presented contract tracking as the most credible method of linking consumer demand for cleaner power with generation supply, in the absence of a national disclosure requirement. The NRDC proposal outlined a mechanism for reporting, including provision of unit-specific information to the administrator and ISO confirmation that a particular unit was scheduled.

Rationale: NRDC presented this proposal as an interim measure and noted that the system must be flexible to continue to meet its goals as the marketplace develops and if federal initiatives supplant state initiatives.

Enron Draft, September 30, 1997

"Proposed Draft Principles, Environmental Disclosures in the Electricity Marketplace in New Jersey."

In an effort to further define its evolving position, Enron identified the following principles that should be included in an environmental disclosure system:

1. All sellers in the retail electricity marketplace should meet minimum disclosure requirements regarding the environmental characteristics of their products.

2. Disclosure requirements should include fuel mix and emissions characteristics of the generation sources associated with products sold to retail consumers. Emissions disclosures should address sulfur dioxide, nitrogen oxides and carbon dioxide.

3. A "system average" fuel mix and emissions profile for a defined geographic region should be computed periodically by a designated administrator. The system average should reflect, within a reasonable range of accuracy, the characteristics of the generation sources that serve the region. Generators should be required to make available the necessary data to the Administrator for the purpose of performing this computation and this data should be held in strict confidence.

4. If no affirmative claim is made, retail suppliers should be required to use the system average fuel mix and emissions characteristics. If the supplier makes an affirmative claim, it should be required to disclose in the prescribed format and be prepared to substantiate the claim.

5. The Administrator should be charged with updating system averages on a regular basis. Sales made under affirmative claims should be excluded from the system average calculation. Suppliers should periodically report power sold under affirmative claims. Measures should be taken to ensure this commercial information is held in strict confidence.

6. It should be recognized that electrical energy does not carry generation source characteristics. Therefore, source characteristics and electricity should be considered as separate "commodities" that can be traded and sourced independently in the marketplace. For purposes of disclosure, retail sellers should be allowed to acquire source characteristics from any generator within the defined region as a means of substantiating affirmative claims.

7. The Legislature should establish these principles and charge the appropriate administrative agencies with responsibility for implementation details.

Two Coalition Proposals

After analyzing each of the initial proposals and following weeks of discussion and dialogue, the Subcommittee members coalesced around two proposals: the revised NRDC/PSE&G coalition proposal and the Enron/GPUE coalition proposal. Both coalition proposals evolved substantially from the strict tracking- and tagging-based approaches initially put forth by NRDC and Enron, respectively, and reflect efforts by the Subcommittee members to negotiate on the characteristics necessary for environmental disclosure and to address outstanding concerns.

The following summaries highlight the main components in each of the two coalition proposals. The NRDC/PSE&G coalition proposal is presented, in its entirety, in Appendix I. The Enron/GPUE coalition proposal is Appendix II.

Summary of the NRDC/PSE&G Coalition Proposal

The primary goal of the NRDC/PSE&G coalition environmental disclosure proposal is to provide electricity customers with accurate, verifiable and uniform information about the sources and environmental impacts of the power they purchase. The proposal is based on the premise that any disclosure system chosen should be compatible with the future development of an emission performance standard (EPS) or generation performance standard (GPS), in case New Jersey finds that it needs such a system to address the transport of airborne NOx, as well as other emissions into the State.

The NRDC/PSE&G coalition proposal attempts to solve three concerns raised by the Subcommittee regarding the initial proposal (summarized in the preceding section): 1) an information burden on the administrative system; 2) constraints on the power market; and 3) the overall complexity of the original proposal, particularly as it relates to implementation by the October 1998 targeted date for the introduction of retail competition in the State.

Under the revised proposal, each retail provider in New Jersey (load-serving entity or LSE) would be required to disclose to its customers the average fuel mix and emission rates for the generation sources that it relied upon to meet its energy supply requirements. In order to reduce the burden on LSEs, the revised proposal presented to and discussed by the Subcommittee would give LSEs the option of not tracking and disclosing the fuel mix and emissions rates by allowing them to use a high emissions default. Tracking of environmental information would be required only on those energy products which disclose the actual environmental characteristics of the power sold. This voluntary system would be similar in many respects to the ENRON/GPU proposal, with the critical distinction being the fact that the PSE&G/NRDC default mechanism was designed to encourage LSEs to disclose actual environmental information and prevent LSEs from hiding dirty generation in a regional average.

However, PSE&G and NRDC clarified and refined their proposal during the preparation of the Report to provide for a further distinction between the revised PSE&G/NRDC proposal and the proposal put forth by ENRON/GPUE. Under this clarified PSE&G/NRDC system, disclosure and tracking of actual environmental information would be mandatory and reliance on the default would only be permitted for those components of an LSEs energy supply that the LSE determines cannot be reliably tracked to the generating source or where the LSE concludes that such information is unavailable and that fact is confirmed by the Program Auditor.¹ NRDC and PSE&G suggest that the Board develop criteria regarding the specific demonstrations that an LSE must make in order to receive approval for use of the default mechanism in lieu of disclosure of the actual environmental characteristics of those components of its resource mix that it has determined are unavailable. NRDC and PSE&G also suggest that the Board consider placing a strict limitation on the percentage of an LSE's total energy that the LSE could choose not to track so that LSEs do not avoid disclosure where it does not present a significant burden.²

In those instances where emissions rate and fuel mix information for a component of an LSE's energy supply is not tracked, the revised proposal would permit the LSE to substitute a high emission rate default value for that component of its energy portfolio. The default emission rates would be established by the DEP and/or the BPU based on actual historical emissions reported from generating resources with high emissions characteristics, such as a typical grandfathered coal generating station, and not on a regional average. By requiring that the default be to a high emissions rate value, the revised proposal is intended to provide a powerful incentive to LSEs to track all of their actual generation sources and to prevent LSEs from "hiding" dirty generation in a regional average.

For actual environmental claims, each energy retailer would report its fuel mix as a percentage that has been generated from nuclear, coal, oil, natural gas, hydro, solar, wind, biomass, waste or other. Emission rates for CO2, SO2 and NOx would be based on the average lbs/MWh associated with the energy supplied by the LSE. LSEs would also disclose their level of support for energy efficiency programs. An example of a uniform label for environmental disclosure is Appendix III.

The NRDC/PSE&G coalition proposal recommends use of an independent program auditor ("PA") to compile fuel mix and emissions information from the LSEs disclosing actual environmental information and verify it with data obtained from the ISO, EPA, DEP, and from the EIA. In addition, the PA would perform fuel mix and emission rate calculations or such other necessary analysis to determine the "high emissions" rate default. The PA would carry out functions that the ISO might not be best equipped to carry out, such as compiling and verifying affirmative product claims and information from outside the PJM control area. The cost of the PA and program administration would be spread among the LSEs on a load-share basis. To the extent that other states adopt comparable environmental disclosure mechanisms such costs may be shared. Violations of reporting requirements would be referred to the Board and the DEP for their consideration and possible proceedings before the Office of Administrative Law (OAL). Penalties for false or misleading information could lead to civil sanctions and license revocation.

NRDC and PSE&G suggest that the information collected by the Program Auditor to verify the performance of LSEs may also be usable by LSEs to calculate their portfolio emissions rates and fuel sources. Accordingly, the cost and burden on LSEs associated with tracking and disclosure would be small in that LSEs would simply access and use data already collected by the Program Auditor. In addition, to the extent such data can be used by the LSEs, the Program Auditor's verification function would be simplified and disclosure would be based on a uniform and consistent data set.

In addition to the three aforementioned concerns, the revised NRDC/PSE&G proposal addresses three other important issues: 1) the treatment of imported energy; 2) the prevention of gaming strategies; and 3) the inclusion of energy efficiency in the disclosure system. The coalition proposal continues to treat imported energy consistently with the treatment of native load. An even-handed approach on this issue is consistent with Interstate Commerce Clause requirements.

Energy transactions within the PJM control area, including complex chains of agreements, could probably be tracked within the PJM control area and, if deemed advisable, such tracking could be made mandatory in the future. However, this premise is contingent on firm confirmation from the PJM ISO that adequate information exists. While energy bilateral transactions outside the PJM control area will be available, it might be difficult, at least initially, to obtain information regarding other types of transactions.

The proposal recognizes this limitation and encourages marketers to use available information, while acknowledging that initially, data from the PJM control area will be more readily available. Thus, the proposal allows a certain amount of flexibility by recognizing the need for marketers to rely on the default mechanism, thereby accommodating imports into the system, despite the difficulty in determining the precise fuel mix and emissions averages of imported energy.

To address the possibility of gaming the disclosure system, the coalition proposal recommends that, in the future, the State should consider developing rules for unit-level environmental disclosure, rather than relying on company average mix. However, to avoid overburdening the disclosure system at the inception of retail competition, the clarified NRDC/PSE&G coalition proposal recommends that all LSEs calculate the fuel mix and emissions information associated with the power they sell on the basis of generating company averages initially, and allow the system to evolve into the tracking of unit contracts. The guidelines for unit-level disclosure should be developed during the implementation phase, thereby allowing the system to grow with the market.

The NRDC/PSE&G coalition proposal also includes disclosure of investments in energy efficiency measures to show the amount of energy conserved. The specific implementation issues in disclosing energy efficiency would likely rely on the measurement and verification measures already established in the State's open market emissions trading program, and would be addressed during the next, implementation stage of the process. To the extent possible, the NRDC/PSE&G coalition proposal is consistent with the New England pilot.

The proposal is divided into basic first steps, as well as potential enhancements that are recommended for later implementation. The flexibility inherent in the phase-in steps allows the disclosure system to develop along with the competitive energy marketplace. Phasing in the system also allows the State to react to any unforeseen developments, including actions of federal agencies and other states; to modify its plans if advisable; and potentially to evolve to a more comprehensive contract tracking-based system as the necessary infrastructures develop.

The basic disclosure requirements are as follows:

A. Each LSE will be required to disclose the fuel mix and emission rate information for its entire portfolio, including affiliated companies. LSEs that are unable to disclose actual environmental information for components of their resource mix may, at least during the initial phase of implementation, use the default mechanism in lieu of actual disclosure. A later phase could allow LSEs to divide their wholesale portfolios into distinct energy products and to market power with environmentally preferable characteristics.

B. Historical information would be updated regularly, based on a rolling average for the prior twelve months (or a lesser period if the LSE has made retail sales in the State for less than one year).

C. Retail marketers are encouraged to use as much information about their actual sources as possible by requiring those energy retailers who do not disclose specific environmental data to default to a high emissions scenario for that component of their resource mix and, in a later phase, by limiting the percentage of the LSE's portfolio with respect to which it could use this default.

Summary of the Enron/GPUE Coalition Proposal

The ENRON/GPUE proposal is based on the following principles: the information provided to customers must be collected on a consistent basis; treated in an appropriately confidential manner; reported in a uniform, accurate, and simple format to enable customers to understand and to utilize the data; result in equity for retailers and compatibility with the existing electricity market; and allow flexibility to modify the disclosure system, as needed. The proposal is designed to allow the customer to drive the development of the electricity market as well as the resultant "product offerings". The Enron/GPUE proposal views environmental disclosure as a mechanism to allow consumers to have a positive impact on cleaner power generating resources, and not as a solution to the transport of emissions.

Retail energy suppliers would be required to meet minimum information disclosure requirements. The ENRON/GPUE coalition proposal recommends the creation of a central, non-biased "system administrator" (SA), responsible for retrospectively compiling information on fuel mix and emissions of targeted pollutants. The SA would procure data from available sources, including the PJM Interconnection, FERC, National Energy Regulatory Commission (NERC), DEP and EPA. The SA would be responsible for calculating regional fuel mix and emissions averages on a power pool basis. Emissions data for CO2, SO2, and NOx, would be aggregated. The SA would ensure that the environmental information was updated on a regular and consistent basis.

Customers would receive the regional information in a simple, uniform format. This could include a graphic representation of fuels associated with regional energy production and the average, related emissions performance of these units. Only retailers making affirmative marketing claims regarding the environmental characteristics of an energy product would be required to disclose information specific to that claim. Therefore, disclosure of information which differs from the pool average would only be made by those selling "clean"energy.

The information collected by the SA would be used for the verification of the environmental claims and to support the pool-wide emissions default label. Energy sources relied upon to back "clean" energy claims would be excluded in the calculation of this residual pool-wide average, acknowledging that these resources have been committed to supporting specific product claims. All claims-based disclosures would be required to comply with Federal Trade Commission marketing guidelines.

The Enron/GPUE coalition proposal stresses that information disclosure must be supported by an objective customer education campaign to ensure that customers possess the understanding to make meaningful decisions relative to their market preferences.

The Enron/GPUE coalition disclosure system does not preclude further discussion of the development of separate source characteristics and electricity "commodities" that could be traded and sourced independently in the marketplace. The trading of environmental tags, however, is not a requirement in this proposal.

Comparison of the Two Coalition Proposals to the Goals and Mission Statement and the List of Issues

The goal of Subcommittee is to recommend a method of environmental disclosure that is "verifiable and both financially and practically feasible..." Both coalition proposals advance a method for accurately verifying claims made as to the environmental attributes of the energy sold. A determination on the feasibility of the two coalition proposals requires further study. Currently, the financial ramifications for either proposal remain unknown, although the cost for the NRDC/PSE&G tracking system will be greater than the Enron/GPUE proposal, to the extent that it requires a greater amount of verification of the actual environmental characteristics of power sold. Supporters from both coalitions have agreed to work together during the implementation phase of environmental disclosure to assess the cost implications of the tracking and verification levels in both proposals. A significant part of this collaboration will entail the development of a Request for Proposal (RFP) that will result in specific cost estimates.

The Subcommittee also agreed that the environmental disclosure system should "collect information in a way that is compatible with an emission portfolio standard (EPS) and other steps that may be part of the State's contingency plan to address air pollutant transport" and to "help State agencies track the environmental impacts of restructuring the electric industry." The NRDC/PSE&G coalition proposal is compatible with the development of an EPS and supports the analysis of the environmental impacts of restructuring.

The NRDC/PSE&G coalition proposal's strong incentive for disclosure (default to a high emissions standard) would probably result in a greater number of marketers disclosing environmental information specific to their product, thus allowing a greater level of analysis on the environmental impact of restructuring. However, marketers and potential LSEs have raised the concern that an additional administrative burden might be incurred with an unknown resultant cost associated with the greater level of tracking and verification. In addition, they fear that this additional administrative burden might hinder the competitive market since some LSEs might choose not to compete in the New Jersey market.

The Enron/GPUE coalition proposal does not require and is not designed to encourage disclosure of environmental impacts associated with the generation of power sold in New Jersey. Because it is voluntary in nature, certain Subcommittee members raised the concern that its usefulness with respect to implementation of an EPS or evaluation of the environmental impacts of rulemaking is extremely limited.

Environmental disclosure is intended to form "the basis for the environmental portion of the consumer education effort," and "to help New Jersey achieve compliance with the NAAQS, reduce air pollution,...the consumption of finite natural resources, and limit the emissions of greenhouse gases." Consumer education is an important component of both coalition proposals. The two coalition proposals, by providing the information to allow consumers to choose "cleaner" energy, support the long-term environmental goals of the State.

Information provided to consumers should be "meaningful and useful" and "can be reasonably verified to prevent consumer fraud". Inherent in both the NRDC/PSE&G coalition proposal and the Enron/GPUE coalition proposal is the premise that the disclosed environmental information should be simple, uniform, understandable and allow easy comparison among the various claims of the energy retailers. Both coalition proposals were designed to prevent fraudulent marketing claims through tracking and/or auditing of "clean" energy claims. The two coalition proposals are also compatible with Federal Trade Commission marketing guidelines.

The two coalition proposals, while divergent on the issues of the default disclosure mechanism and the degree to which tracking is voluntary, are virtually identical on certain core elements, as well as in numerous components that comprise both proposals. In addressing the list of issues developed by the Subcommittee (previously presented in an earlier section of this report), the two coalition proposals are similar in the following areas:

1) the basic disclosure requirements for fuel mix and emissions data;

2) the need for uniform, simple disclosure, graphic in format, that allows consumers to understand the information and easily compare environmental claims;

3) the need for benchmarks to allow consumers to compare pollutant emissions disclosed with a norm;

4) the need for an independent program auditor (PA) or system administrator (SA) charged with similar functions and responsibilities; (The SA role is significantly less involved in the Enron/GPUE proposal);

5) similar core data collection by the SA or PA;

6) settlement or contract tracking of environmental information (although the level required is dissimilar);

7) recognized need for flexibility to allow for adaptation to the emerging energy markets, as well as to the actions of other states and the initiatives of federal agencies and institutions;

8) need for periodic review of the disclosure system, and revisions implemented, as deemed necessary;

9) intention to work with other states in the collaboration of a greater regional disclosure system;

10) need for authorizing legislation to allow the BPU (and in respect to some matters also the DEP) to promulgate rules to develop and implement an environmental disclosure system and to assess administrative fees;

11) funding support for the disclosure system through administrative fees paid by retailers selling energy in New Jersey;

12) the need for confidentiality protections (provided that they are implemented in a manner and only to the degree that they do not interfere with auditing functions and the tracking of emissions, as appropriate, back to specific generating units); and

13) the need for objective consumer education provided by the relevant state agencies.

The primary difference between the two coalition proposals is the default values that would be reported, in cases where an energy retailer or LSE elects not to, or is unable to, disclose the actual environmental characteristics associated with the power offered, and the suggestion in the NRDC/PSE&G coalition proposal that the Board require some degree of proof of the inability to track and consider placing a limitation on the use of the default mechanism in a later phase of implementation. In the final NRDC/PSE&G coalition proposal, the LSE would default to a "high emissions" value that would be determined at a later date. The Enron/GPUE coalition proposal allows LSEs not making an environmental claim for its product to default to a regional average for both fuel mix and emissions, from which affirmative claims contracts would be netted out.

This difference in the two proposals is expected to have an impact on the number of retailers disclosing the actual environmental characteristics of the energy they sell, the subsequent level of settlement or contract tracking conducted, and the cost of implementing the disclosure system. In the further clarified NRDC/PSE&G coalition proposal, the constraints on the use of the emissions default mechanism introduce a greater difference between the two proposals.

The further clarified NRDC/PSE&G coalition proposal contains a strong incentive for retailers to disclose specific data, and thereby avoid defaulting to a high emissions value. If a greater number of retailers disclose environmental information specific to their energy offered, it follows that a higher level of tracking would be conducted. It is presumed that the associated implementation costs of the two disclosure systems would differ, but at this stage, it is not possible to offer any estimates for either proposal.

A more detailed explanation of the agreements and remaining disagreements between the two coalition proposals are provided in "Consensus" and "Unresolved Issues" sections of this report.

In addition to the numerous areas of agreement and the major area of disagreement, the Subcommittee decided that a number of factors should be studied further in an implementation stage. Therefore, neither of the two proposals is specific in the areas of methodologies to be used to calculate benchmarks, the rating process, tracking mechanisms and the disclosure format.

Recommendations for Phase One of Environmental Disclosure - Areas of Consensus Between the NRDC/PSE&G Coalition Proposal and the ENRON/GPUE Proposal

The NRDC/PSE&G coalition proposal and the Enron/GPUE proposals agree on a number of key elements. During the months of discussion, both proposals evolved through the authors' willingness to address concerns raised by other Subcommittee members. Each newly-presented version constituted progressive refinement of previous proposals. Concessions were made by both coalitions in an attempt to reach a middle ground based on core principles and in recognition of practical constraints on implementation. During this phase of its work, the Environmental Disclosure Subcommittee focused on the conceptual, policy decisions needed for environmental disclosure. Based upon agreements reached, the Subcommittee recommends the following points of consensus for the Executive Committee's consideration:

1) A disclosure system should be implemented in New Jersey to provide electricity customers with accurate, verifiable, and uniform information about the environmental characteristics of the energy purchased, along with information on cost and contract terms.

2) Consumers should be given the opportunity to make decisions in the deregulated energy marketplace, including the environmental characteristics of the energy they purchase, and energy suppliers have the responsibility to provide a common set of information. Both coalition proposals rest on this basic premise.

3) The development of the environmental disclosure system should be divided into two phases. This initial phase focuses on decision-making for the policy framework. Work in the second phase should recommend the detailed design and implementation steps. During Phase Two, Subcommittee members, including representatives from both coalitions, pledge to collaboratively advise the Board on defining the role of the program or system administrator; determining the implementation cost for both proposals through a Request for Proposal (RFP) process; and evaluating the appropriate level of limitation of the use of either default mechanism.

4) Legislation should be proposed for members of the State Legislature to consider, that at a minimum, authorizes the Board to require disclosure obligations/requirements from all load serving entities (LSEs) doing business in New Jersey. The legislation should allow the Board to assess administrative fees to be paid by the LSEs, based fairly and equitably on their share of the energy market in New Jersey (i.e., per megawatt hour), to create a fund for one or more independent entities to implement and oversee specified aspects of the process of implementing environmental disclosure. The Board, in consultation with the DEP, should be given the responsibility to develop benchmarks based on New Jersey's environmental goals and targets. The Board, and as applicable, the DEP, should be authorized to promulgate rules for implementing disclosure obligations/requirements.

5) State agencies should develop and implement a comprehensive consumer education effort, that includes an environmental education component. Consumer education is essential to both coalition proposals. All parties agree that the relevant State agencies should collaborate to develop an information packet of unbiased information explaining the concept of environmental disclosure and the air quality problems underlying this action. Input will be sought from the public in the drafting of this packet. The development of the informational materials will be initiated as soon as possible, and will be coordinated with the consumer education effort.

6) The mission statement and the list of issues that predicated the development of the environmental disclosure proposals contained in this report were collaboratively developed and agreed upon by a majority of the Subcommittee members. These were presented in the Introduction section of this report.

7) Both proposals call for the creation of a program auditor (PA) or system administrator (SA) responsible for verifying audits of the accuracy of the information disclosed by the LSEs. Both also call for support from the PJM ISO. The PA or SA would obtain relevant data from the EPA and the EIA and obtain from the PJM ISO the energy transaction data.

8) Subcommittee members agree that the cost of the auditor/administrator's functions should be paid through a fee assessed on the LSEs doing business in the State, fairly allocated based on energy (megawatts per hour) sold. Although the role and responsibilities for the auditor or system administrator have not yet been fully defined for either proposal, it appears that similar core data collection is required in either case.

9) Subcommittee members agree on the need for strict adherence to confidentiality requirements for all transaction data consistent with the need for auditing, including pro-rated unit-specific emissions disclosure for environmental claims. It might be necessary to have a contractual agreement between the PJM ISO and the independent auditor. PSE&G and ENRON have agreed to work together to more comprehensively define the role of the administrator in data collection and the auditing function. This joint project, to be completed during the implementation phase, could be the basis for a Request for Proposals (RFP) to initiate a contract for the creation of a PA.

10) Both proposals agree that, initially, emissions of three specific air contaminants should be disclosed on customers' bills, as well as in contract and marketing materials: sulfur dioxide (SO2), carbon dioxide (CO2), and oxides of nitrogen (NOx).

11) The environmental component of disclosure should include percentages of fuel mix (i.e., coal, oil, etc.).

12) The fuel source categories that should be disclosed are: oil, gas, nuclear, coal, hydroelectric, solar, wind and biomass. Subcommittee members agree that pumped hydro storage should not be included in the hydro category.

13) Environmental disclosure should rest on the principle of comparability of information, that is, allow all consumers to read and easily compare environmental characteristics.

14) A process for periodic review of disclosure requirements should be implemented to allow for the possible revision of the types of information needed. It might be necessary in the future, as data on other pollutants becomes available and/or in response to research on health effects or to federal directives, to include disclosure of emissions information for additional pollutants, such as particulate matter. The specific review process, including determination criteria and the frequency of review, should be determined during the implementation phase.

15) A benchmark should be developed for each air pollutant emission disclosed. The benchmark would be a guide to help customers compare a supplier's emission level to a norm. The recommended benchmark might be a New Jersey clean air target or State emission average. The benchmark should be determined during the implementation phase.

16) The methodology used to calculate the emissions disclosed should reflect emissions per unit of energy output (pounds per kilowatt hour). The Subcommittee recommends that the specific methodology should be determined during the implementation phase. Subcommittee members also recommend that the depiction of emissions should be uniform among all suppliers' materials, graphic in nature, and simple. The specific type of depiction will be addressed during the implementation phase.

17) Customers should be informed that the information given reflects the generation for which they are paying, not necessarily the characteristics of the electrons that the customer is actually receiving. Whenever regional average or "high emissions" default mechanisms are used, this should be clearly indicated and these disclaimers should reflect Federal Trade Commission (FTC) requirements.

18) All claims must be consistent with FTC requirements.

19) With the Executive Committee's consent and under its direction, both coalitions agree to work together during the implementation phase to define the role of the system or program auditor and to determine the cost of implementation through the RFP process.

The above recommendations address the basic direction the State should take in the development of an environmental disclosure system. During the following months, State agencies should work together, with guidance from interested stakeholders, to resolve problems and make recommendations on implementation issues. This report identifies a number of the issues and actions that need to be addressed during the second implementation phase.

Recommendations for Phase Two, Implementation Phase - Environmental Disclosure Development

During the second phase in the development of an environmental disclosure system, the following work should be pursued:

1) Evaluation of the specific emissions and fuel mix default mechanisms recommended in both coalition proposals, including the "high emissions" default in the NRDC/PSE&G coalition proposal and the "residual system average" advocated by the Enron/GPUE coalition proposal.

2) Determination of the appropriate level of limitation in the use of either default mechanism in both the short-term, transitional period and in the long term.

3) Coordination between New Jersey state agencies and other states, particularly those states located in the PJM region, in an effort to develop a regional system for environmental disclosure.

4) Development of recommendations for the distribution of disclosure information, including the determination of who should receive the information, when, and in what types of venue (i.e., bills, marketing materials, contracts).

5) Development of recommendations for methods of calculations; frequency for updating disclosure information; and the margin of error that should be allowed (i.e., the precision of the disclosure data.

6) Development of process recommendations for handling new products and suppliers (for example, prospective disclosure).

7) Development of procedural recommendations for addressing emissions and fuel mix information for power produced outside the PJM region.

8) Development of recommendations for definitions for biomass and innovative technology (the EPA definitions will be the starting point for discussion.

9) Evaluation of specific procedures for measuring support of energy efficiency (i.e., demand-side management); benchmarking such support; and formats for disclosing such support.³

10) Development of recommendations on who should serve as auditor or administrator of the disclosure system and this entity's precise responsibilities for data collection, verification and auditing function; calculation of commonly available data elements.

11) Development of recommendations for the computation and/or the specific information/data that the auditor/administrator will need to collect, track, verify, and calculate.

12) Development of recommendations for the graphic depiction of environmental information (the New England label will be used as the starting point for discussion) (Appendix III).

13) Development of recommendations for the required categories to be used in reporting fuel mix and the criteria for determining when a separate category should be created.

14) Development of recommendations for the specific information that will be needed from EIA, EPA, PJM ISO, retailers selling energy in New Jersey and other regional ISOs.

15) The development of recommendations on how customers should be provided with environmental information, and the timing of disclosure, should be developed during the implementation phase. Subcommittee members agree that in any solicitation, the environmental information should be provided to the customer upfront, before the contract is signed. Furthermore, it is agreed that it is not necessary for all environmental information to be included in every piece of material. It is probably not necessary to have the identical information in marketing material and in bills, but disclosure in different media's should be consistent. The specific guidelines for how often the disclosure information needs to be updated should also be developed during the implementation phase.

Unresolved Issues

The primary area of difference in the two coalition proposals is the default values that would be reported, when a LSE elects not to make an affirmative claim as to the environmental characteristics of the power offered/provided. The ENRON/GPUE proposal would allow the default value to be a regional average for both fuel mix and emissions, from which affirmative claims contracts have been netted out. The NRDC/PSE&G proposal would require the default to be a high emissions scenario: the emissions reported would be a high emissions average that would be defined during the implementation stage.

As previously explained in the comparison of the two proposals, the default chosen will have an impact on the number of retailers disclosing specific information on their energy sold, the subsequent level of settlement or contract tracking conducted, and the cost of implementing the disclosure system. The NRDC/PSE&G coalition is designed to provide incentives for retailer marketers to disclose specific environmental information's. The Enron/GPUE coalition proposal is designed to encourage retail suppliers to develop and market cleaner generation products and renewables while reducing the administrative burden by having retailers disclose information that would be subject to verification and legal liability.

As recommended, Phase Two should include evaluation of the specific emissions and fuel mix default mechanisms recommended in both coalition proposals, including the "high emissions" default in the NRDC/PSE&G coalition proposal and the "residual system average" advocated by the Enron/GPUE coalition proposal.

A related area of difference (depending on how the program is implemented) is the degree to which the disclosure system would reveal unit-specific information. Such information could prove valuable to state regulators if they find it necessary to implement an emission portfolio standard or other contingency measures to address the emissions transport issue, but may be unduly burdensome for LSEs given the operational characteristics of the marketplace.

Under the ENRON/GPUE approach, such information would be provided only for units for which an affirmative (clean energy) claim is made. It is possible that energy retailers would rely on the regional residual emissions average to meet their reporting requirements. The Enron/GPUE model allows consumers to dictate the market rather than pre-assuming all consumers desire a settlement-based tracking system. In contrast, the NRDC/PSE&G proposal includes incentives that would encourage the LSE to make specific affirmative claims and would require unit-specific information to be provided at least for all generation units served by the PJM ISO. As previously stated, the number of retailers making "clean" energy claims, and the corresponding tracking and verification, would have an impact on the cost and administrative responsibility.

In the next generation of environmental disclosure, a future evaluation will need to address the basis on which information is provided when a LSE elects to make an affirmative claim as to the environmental characteristics of the power offered/provided. In the current coalition proposals, disclosure of product-specific information versus disclosure of company and/or plant information has been tabled for future consideration. However, the ENRON/GPUE coalition proposal is consistent with the provision of product-specific disclosure information. The PSE&G/NRDC proposal leans toward allowing product specific information only in the case where bilateral contracts are in place. Otherwise, that information would be represented as a "slice" of the retailer's overall portfolio.

Another issue that remains unresolved within the Subcommittee is that of the inclusion of energy efficiency in the disclosure label. Energy efficiency is at the top of the hierarchy of methods for addressing pollution. When power does not need to be generated because of efficiencies, any pollution that would have resulted from such power generation is prevented. Therefore, the DEP recommended that support of energy efficiency be one of the elements rated on the environmental disclosure label. No consensus was reached, however, on whether this should be done.

Footnotes

1) For those portions or components of an LSEs energy supply which come from their own generation, pool purchases or most bilateral contracts, the necessary information is readily available. _Back

2) Certain aspects of the NRDC/PSE&G coalition proposal, including a limitation in the use of the default mechanism, were developed subsequent to the Subcommittee meetings. Therefore, Subcommittee members have not had an opportunity discussed . _Back

3) Not all Subcommittee members have agreed to the inclusion of energy efficiency in environmental disclosure. It should be noted that the DEP considers reliance on energy efficiency measures as an important strategy for achieving pollution prevention. Therefore, the DEP recommends that the environmental disclosure label credit retailers for their support of energy efficiency or reflect lack of such support. _Back

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