Statement of the United Technologies Corporation

United Technologies Corporation (UTC) is based in Hartford, Connecticut and provides a broad range of high-technology products and support services to the building systems and aerospace industries. Our products include Carrier air conditioners, Otis elevators and escalators, Pratt & Whitney jet engines, Sikorsky helicopters, Hamilton Sundstrand aerospace systems and fuel cells by International Fuel Cells.

As the House Ways & Means Committee and its Subcommittee on Select Revenue Measures consider tax policy initiatives that would encourage energy efficiency and conservation, UTC would like to recommend several actions that would accelerate deployment of clean, energy-efficient technology. UTC supports tax credits for fuel cells in general and specifically endorses H.R. 1275, introduced by Rep. Nancy Johnson (R-CT) and Rep. Michael McNulty (D-NY), and its companion measure S. 828 sponsored by Senator Joseph Lieberman (D-CT) and Senator Olympia Snowe (R-ME). These bills propose adoption of a five-year, $1,000 per kilowatt stationary fuel cell tax credit that would accelerate the commercialization of fuel cell technology.

Tax credits for mobile fuel cell applications also have been the subject of various legislative proposals and recommended in President Bush’s National Energy Policy. As fuel cell vehicles become commercially available, United Technologies supports the use of tax incentives to accelerate their deployment.

UTC also endorses a change in the depreciation schedule for large commercial chillers that would generate significant energy savings. In addition, we support tax incentives for residential air conditioners that reflect both the energy efficiency as well as non-ozone depleting characteristics of the equipment.

UTC spends an average of $1 billion per year on research and development. Our corporate environment, health and safety policy includes commitments to conserve natural resources in the design, manufacture, use and disposal of products and the delivery of services; and develop technologies and methods to assure safe workplaces and to protect the environment worldwide. UTC has invested heavily in bringing clean, energy-efficient technology to the global marketplace. Working together with Congress and the Administration, we can maximize the benefits of these innovative technologies through a variety of measures, including the use of tax incentives and changes to the depreciation schedule.

Fuel cells are the cleanest, fossil-fuel generating technology available today. They use an electrochemical process to convert chemical energy directly from natural gas or other hydrogen-rich fuel sources into electricity and hot water at a very high level of efficiency.

Fuel cells are not a futuristic dream. More than 250 U.S. astronauts have depended on UTC’s fuel cell products to provide all the electrical power and drinking water used in every manned U. S. space mission since 1966. Each space shuttle mission carries three IFC 12 kW fuel cell units and we have accumulated more than 81,000 hours of fuel cell operating experience in the most demanding environment of all – outer space.

Closer to home, IFC has produced and sold more than 220 fuel cell systems in 16 countries on five continents. We’re the only company in the world with a commercial fuel cell product available today. It’s known as the PC25ä fuel cell power plant and it produces 200 kWs of power and 900,000 BTUs of heat per hour. Each unit provides enough power for roughly 150 homes. The worldwide fleet of PC25s has accumulated more than four million hours of operating experience with proven reliability. The PC25 system requires only routine maintenance and has a life of 40,000 hours or five years before a major overhaul is required.

Deployment of fuel cell technology will generate environmental benefits, provide a reliable source of power for homeowners and businesses, reduce dependence on foreign oil supplies, help commercialize clean technology, enhance U.S. technological leadership and create economic benefits for the nation. Enactment of a fuel cell tax credit will help accelerate the deployment of fuel cell technology and make its many benefits available more quickly and more broadly. By acting now, the U.S. can continue to maintain its technology leadership, generating high-skill jobs and creating opportunities for economic growth and exports in the process. It should be noted that 56% of the PC25s sold to date have gone to foreign customers.

Since fuel cells operate without combustion, they are virtually pollution-free. In addition, they produce significantly lower levels of carbon dioxide emissions, the primary man-made greenhouse gas that contributes to climate change. For example, while the average fossil fuel generating station produces as much as 25 pounds of pollutants to generate 1,000 kilowatt-hours of electricity, the PC25 power plant produces less than an ounce.

The existing fleet of PC25s has already prevented nearly 800 million pounds of CO₂ emissions and more than 14.5 million pounds of NO_x and SO_x compared with typical U.S. combustion-based power plants. The U.S. Environmental Protection Agency recognized IFC last year with a Climate Protection Award in recognition of these accomplishments.

Fuel cells are inherently more efficient than combustion-based systems. In the "electricity-only" mode of operation, IFC’s PC25 unit achieves approximately 40% efficiency. When the waste heat from the fuel cell is utilized, an efficiency of 87% can be achieved. In addition, fuel cells can be installed at the point of use, thus eliminating transmission line losses that can run as high as 15%.

Fuel cells can provide power at the point of use, thereby alleviating the load on the existing transmission and distribution infrastructure, and eliminating or minimizing the need for additional investment in the current transmission and distribution network.

The use of fuel cells helps to diversify the energy market and reduce reliance on imported oil. Fuel cells can operate with a variety of fuel sources, but most commonly use natural gas.

Unlike other environmentally favorable solutions, fuel cells can be used as continuous sources of base power – independent of time-of-day or weather - for critical facilities and power requirements.

Its compact size, quiet operation and near-zero emissions allow a fuel cell system such as the PC25 to be sited easily in communities and neighborhoods. Unlike many other forms of power generation, fuel cell power plants are good neighbors. For example, two PC25s are located inside the Conde Nast skyscraper at Four Times Square in New York City.

Fuel cell power plants offer a solution when power is needed on-site, or when distribution line upgrades become cost-prohibitive and/or environmentally unattractive. For example, a PC25 installed at the Central Park Police Station in New York City provides all the power for the facility in an onsite installation. In this case, it would have been too expensive to dig up Central Park and install an additional power line, so the fuel cell became the ideal solution for an operation that required a dedicated, reliable power supply and flexible sitting.

Several hospitals in the U.S., including Department of Defense facilities, rely on PC25 systems to provide on-line emergency power. In Rhode Island, for example, a PC25 system provides power for the South County Hospital. The installation supplies base load electrical and thermal energy to the hospital and helps ensure clean, reliable power for sensitive medical equipment and systems such as CAT scanners, monitors, analyzers and laboratory test equipment. If there is a grid outage, the PC25 automatically operates as an independent system, continuing to power critical loads at the hospital. Heat from the installation provides energy for space heating, increasing the fuel cell’s overall efficiency.

The largest commercial fuel cell system in the world is currently operating at a U.S. Postal Service facility in Anchorage, Alaska. The system provides one megawatt of clean, reliable fuel cell power by joining five PC25 units. In this installation, the units operate in parallel to the grid and are owned and operated by the local utility. The system is seen as a single, one-megawatt generation asset and is dispatched by the utility through its standard dispatch system. The system is designed so the fuel cells can provide power either to the U.S. Postal Service mail-processing center or to the grid. In case the grid fails, a nearly instantaneous switching system automatically disconnects the grid and allows the fuel cells to provide uninterrupted power.

As our society increases its reliance on sophisticated computer systems, very short power interruptions can have profound economic consequences. In 1996, the Electric Power Research Institute reported that U.S. businesses lose $29 billion annually from computer failures due to power outages and lost productivity.

PC25 power plants are currently delivering assured power at critical power sites such as military installations, hospitals, data processing centers, and sites where sensitive manufacturing processes take place. One of IFC’s installations at the First National Bank of Omaha where four fuel cells are the major component of an integrated assured power system, is meeting customer requirements for 99.9999% reliability. This translates into a power interruption of one minute every six years.

The Conde Nast Building at Four Times Square in New York City is a "green building" with two PC25 power plants installed inside that provide five percent of the building’s electrical needs. If there is a blackout, the systems are capable of operating independently of the utility grid to maintain power to critical mechanical components and external landmark signage on the façade of the building. The waste heat from the unit is used to run the air conditioning and the power plants provide critical backup power in case the grid fails.

When fueled by anaerobic digester gases or biogas from wastewater treatment facilities, fuel cells are a source of renewable power. IFC and the U.S. Environmental Protection Agency (EPA) collaborated in the early 1990s on a greenhouse gas mitigation program that continues to bear fruit today. Initial efforts targeted landfills and the development of gas cleanup systems that enable fuel cells to use waste methane to generate electricity and resulted in the issuance of several patents jointly held by EPA and IFC. These systems prevent methane – a potent greenhouse gas – from being released into the environment and obviate the use of fossil fuels as the fuel source.

Follow-on work has focused on anaerobic digester off-gases (ADGs) from wastewater treatment facilities. This technology has been implemented successfully at PC25 installations in Yonkers, New York; Calabasas, California; Boston, Massachusetts and Portland, Oregon as well as Cologne, Germany and Tokyo, Japan.

The examples noted above demonstrate the flexibility of fuel cell technology and its appeal to many different customers with a wide range of requirements. But it gets better. Fuel cell technology and its associated benefits, which have broad application in the commercial/industrial sector, is also being developed for homes, small businesses, cars, trucks and buses.

IFC is currently pursuing residential and light commercial fuel cell applications for homes and businesses. These units will use next-generation proton exchange membrane (PEM) fuel cell technology. We are drawing on our experience in both commercial and mobile fuel cell programs to develop a five-kilowatt PEM fuel cell system suitable for homes and small commercial buildings. IFC is teaming up with its sister UTC unit, Carrier Corporation, the world’s largest maker of air conditioners, as well as Toshiba Corporation and Buderus Heiztechnik on this effort. We are currently testing our residential power plants and plan to have residential fuel cells units commercially available in 2003.

The cost of fuel cells has been reduced dramatically in the past decade. The space shuttle application had a price tag of $600,000 per kW. Commercial stationary units being installed today cost $4,500 per kW, but fuel cells are still not competitive with existing technology, which costs about $1,500 per kW. Fuel cell production volumes are low, which increases their cost. Increased volume is needed to bring the purchase cost down and accelerate commercialization of this clean, reliable, efficient source of power so its benefits can be more widely realized.

Adoption of a fuel cell tax credit is consistent with financial incentives currently enjoyed by other energy sources including wind and solar technology. In addition, it builds upon the Department of Defense/Department of Energy fuel cell "buydown" grant program that was initiated in FY’95. The fuel cell tax credit provisions contained in H.R. 1275 and S. 828 are consistent with the $1,000 per kW, up to one third of the cost of the equipment benefit currently made available to federal facilities and municipalities through the DOD/DOE grant program. We support continuation of the federal grant program for public sector and non-profit purchases of fuel cells and enactment of a fuel cell tax credit to aid private sector customers.

UTC/IFC is leading the industry effort to secure a tax credit for homeowners and business property owners who purchase stationary fuel cells. This initiative has gained support from major fuel cell manufacturers, suppliers and related organizations as indicated in Attachment A.

There have been a variety of legislative proposals in the 107^th and previous Congresses that would provide tax incentives for fuel cell technology. While these bills differ in the scope of applications covered, the amount of credit and other details, a bipartisan and diverse group of Members of Congress and Administration officials support the concept of a tax credit for fuel cells. The recent National Energy Policy (NEP) recommendations released by the White House also reflect the Bush Administration’s endorsement of the technology and its support for fuel cell tax credits. The NEP refers to fuel cells as a promising distributed generation technology and recommends additional effort in the integration of fuel cells, hydrogen and distributed generation initiatives.

UTC’S Carrier division is the world’s largest manufacturer of air conditioning, heating and refrigeration systems. The company believes that with market leadership comes the responsibility for environmental leadership. Carrier continues to lead the global air conditioning and refrigeration industry in the phaseout of ozone-depleting refrigerants well ahead of international and domestic mandates. And while pioneering the technologies to enable this transition to non-ozone depleting products, Carrier has also increased energy efficiency, minimized materials and product weight, introduced new air quality management features and developed the tools to evaluate a holistic building systems approach to indoor comfort cooling.

The heating, air conditioning and refrigeration industry has made significant improvements over the past two decades in technologies that benefit the environment. And while these technologies are readily available for consumers today, barriers to full deployment do exist, preventing the realization of maximum environmental benefit.

In the commercial air conditioning market, major advancements have been achieved in large-building chiller technology. Not only does Carrier manufacture non-ozone-depleting chillers throughout the world; these same products are, on average, 20% more efficient than their counterparts of 20 years ago, with 10-15% less weight for the same capacity. This has reduced raw materials like steel and saved the intensive energy required to produce it. In fact, we believe the industry is saving 16 million pounds of steel each year, or enough to build 7,000 cars.

Despite these breakthroughs, more than 44,000 old, inefficient, CFC-based ozone-depleting chillers remain in operation in the United States. If these chillers were replaced with today’s products, roughly seven billion kilowatt hours per year would be saved, enough to power 740,000 homes on an annual basis, saving four million tons of carbon emissions at power plants. We believe these old CFC chillers would be replaced more rapidly if it weren’t for the U.S. tax code, which allows building owners to depreciate chillers over a staggering 39-year period! If this term were reduced to 15 or 20 years, the advanced chiller technologies would become more prevalent in the marketplace sooner, to the benefit of the environment.

Equal advancements have been made in residential systems within the last decade. Carrier introduced the world’s first non-ozone-depleting residential central air conditioning system, called Puron, in 1996 -- a full 14 years prior to the deadline mandated by the Clean Air Act. And while we’re proud to have been the first, we also congratulate the three other major manufacturers that have followed suit so far.

Carrier also leads the residential market with the highest rated efficiencies and supports a full 20% increase in the federal minimum energy efficiency standard. But Carrier also believes that federal and state governments can do more to deploy high efficiency products more rapidly through tax incentives. We congratulate Rep. Duke Cunningham (R-CA) and Senator Bob Smith (R-NH) for introducing H.R. 778 and S. 207, respectively, which we view as a good framework for tax incentives, especially if the levels start at 13 SEER (Seasonal Energy Efficiency Rating – the miles-per-gallon equivalent for air conditioning equipment).

But as federal and state governments examine tax credits, we would like to point out that opportunities exist to maximize these incentives for additional environmental benefit, like ozone protection, along with energy efficiency. Not too long ago, there was a trade-off between efficiency and ozone protection. Most residential systems sold today operate with an ozone-depleting refrigerant scheduled for phaseout in new products in 2010. The amount of this refrigerant required for higher efficiency systems, like 13 SEER, is 40% greater than standard 10 SEER systems. Fortunately, Carrier pioneered the technology that other manufacturers have followed to avoid this "Hobson’s choice" of efficiency or ozone protection. Clearly and happily we can have both, and we urge any tax incentive plan to maximize the environmental benefits of efficiency combined with ozone protection.

UTC products have useful lives that can be measured in decades. That’s one of the reasons our corporate environment, health and safety policy statement requires conservation of natural resources in the design, manufacture, use and disposal of products and delivery of services. It also mandates that we make safety and environmental considerations priorities in new product development and investment decisions.

UTC products offer the potential for significant energy savings as well as improved environmental quality. Working with government to adopt appropriate financial incentives as outlined above, we can ensure that these benefits are optimized and accelerated. We look forward to working with Congress, the Administration and other stakeholders to achieve these goals.

WHY SHOULD CONGRESS AND THE ADMINISTRATION SUPPORT A STATIONARY FUEL CELL TAX CREDIT?

Overview
A fuel cell is a device that uses any hydrogen-rich fuel to generate electricity and thermal energy through an electrochemical process at high efficiency and near zero emissions. Fuel cell developers, component suppliers, utilities and other parties with an interest in clean distributed generation technology are working together to enact tax credit legislation that will accelerate commercialization of a wide range of fuel cell technologies.

Credit Description
The $1000 per kilowatt credit will be applicable for purchasers of all types and sizes of stationary fuel cell systems. It will be available for five years, January 1, 2002-December 31, 2006, at which point fuel cell manufacturers should be able to produce a product at market entry cost. The credit does not specify input fuels, applications or system sizes so a diverse group of customers can take short-term advantage of the credit to deploy a wide range of fuel cell equipment.

• A credit will allow access to fuel cells by more customers NOW when there is a grave need for reliable power in many parts of the country.
• A credit will speed market introduction of fuel cell systems.
• A credit will create an incentive for prospective customers, thus increasing volume and reducing manufacturing costs. As with any new technology, price per unit decreases as volume of production increases.
• A credit will speed the development of a manufacturing base of component and sub-system suppliers.

• Because fuel cell systems operate without combustion, they are one of the cleanest means of generating electricity.
• While energy efficiency varies among the different fuel cell technologies, fuel cells are one of the most energy efficient means of converting fossil and renewable fuels into electricity developed to date.
• Fuel cell systems can provide very reliable, uninterruptible power. For example, fuel cells in an integrated power supply system can deliver "six nines" or 99.9999% reliability. Thus fuel cells are very attractive for applications that are highly sensitive to power grid transmission problems such as distortions or power interruptions.
• As a distributed generation technology, fuel cells address the immediate need for secure and adequate energy supplies, while reducing grid demand and increasing grid flexibility.
• Installation of fuel cell systems provides consumer choice in fuel selection and permits siting in remote locations that are "off grid."
• Fuel cell systems can be used by electric utilities to fill load pockets when and where new large-scale power plants are impractical or cannot be sited.
• Fuel cell systems, as a distributed generation resource, avoid costly and environmentally problematic installation of transmission and distribution systems.

The five-year budgetary impact of the credit is less than $500 million.

Contact Judith Bayer at 202-336-7436 or Bayerj@corpdc.utc.com if you have questions.
5/31/01

KEY ELEMENTS OF A FUEL CELL TAX CREDIT FOR
STATIONARY APPLICATIONS

Overview
The goal of the stationary fuel cell tax credit is to create an incentive for the purchase of fuel cells for residential and commercial use. The prompt deployment of such equipment will generate environmental benefits, provide a reliable source of power for homeowners and businesses, reduce our nation’s dependence on foreign oil supplies, help commercialize clean technology, enhance US technology leadership and create economic benefits for the nation.

Fuel cell tax credit proposals should be designed to benefit a wide range of potential fuel cell customers and manufacturers. They should therefore be all-inclusive without discriminating between different kilowatt sized units, type of technology, application, fuel source or other criteria. Efforts should be made to keep the proposals as simple as possible to aid in effective implementation. In addition, the proposals should strike a balance between ensuring the level of tax credit provided represents a meaningful incentive that will stimulate purchase and deployment of the technology while minimizing the budgetary impact.

The following are specific elements suggested for consideration and inclusion:

Coverage
US business and residential taxpayers that purchase fuel cell systems for stationary commercial and residential applications should be eligible for the credit.

Basis for credit
The credit should be based on a "per kilowatt" approach with no distinction made for the size of unit.

Access to credit
No allocation of credit should be made to specific categories of fuel cells on an annual or total basis.

Fuel Source
No premium or penalty should be imposed based on the fuel source.

Definition of stationary fuel cell power plant
The term `fuel cell power plant' should be defined as "an integrated system comprised of a fuel cell stack assembly, and associated balance of plant components that converts a fuel into electricity using electrochemical means."

Co-generation
No co-generation requirement should be imposed since not all fuel cell technologies offer an effective option for co-generation.

Efficiency
No efficiency criteria should be imposed. Fuel cell systems in the early stages of development, such as residential sized units, cannot predict the efficiency level at this time. Establishing arbitrary efficiency criteria could exclude early models for this important application, which are exactly the units that require incentives. Efficiency levels will vary based on whether proton exchange membrane, phosphoric acid, solid oxide or molten carbonate fuel cell technology is used. Designing fuel cell systems to maximize efficiency may require tradeoffs resulting in more complicated, higher cost, less fuel flexible and less durable units.

Floor/ceiling
No minimum or maximum kilowatt size criteria should be imposed.

Amount of Credit
$1,000 per kW for all qualifying fuel cell power plants. A five-year program with a $500 million budgetary impact is proposed.

Duration
1/1/02- 12/31-06

Contact Judith Bayer at 202-336-7436 or Bayerj@corpdc.utc.com if you have questions.
5/31/01