What exactly is the power industry’s position on cap and trade?

The electric power industry would be affected more than any other by a major climate bill. So the industry’s position on climate legislation is worth understanding. Consider this post weekend reading on the subject.

As Peter Darbee, CEO of Pacific Gas & Electric, testified to Congress in 2007:

If we do not act now, the U.S. will miss the opportunity the become a technology leader, improving our competitiveness, while at the same time increasing the risks that dramatic climate change will occur, stressing both our economy and our citizens.”

To the extent that the power industry speaks with one voice — which as we will see it doesn’t (see article reprinted at the end) — it is represented by Edison Electric Institute here, which offers these principles:

EEI remains committed to working with Congress on enactment of legislation that will produce substantial emissions cuts and mitigate impacts to customers.

EEI will focus its efforts on a cap-and-trade program, but also remain open to a tax-based or hybrid approach in the event the political environment shifts.

EEI will aggressively pursue legislative and regulatory policies in support of climate-friendly technologies.

o Efficiency and renewables are key to near-term reductions.o Maximizing new nuclear is key to mid-to-longer term reductions.o The aggressive development and deployment of carbon capture and storage coupled with advanced coal technologies are necessary to preserving the coal option.o Plug-in hybrid electric vehicles (PHEVs) and electric vehicles (EVs) can make a major contribution to reducing net GHG emissions, as well as to reducing foreign oil dependence and consumer prices at the pump.

My point in this post is not primarily to “debunk” this position, but primarily to present it. Obviously, I don’t agree with the sentiment above about nuclear power (see “An introduction to nuclear power”), but the strong support for efficiency, renewables, and plugs ins are welcome.

Long-term targets (e.g., 2050) should be set at an 80% reduction below current levels.

Interim targets should be aligned with technology availability.

o Near-term targets should be set and driven by efforts on energy efficiency, renewable energy, and, to some extent, new nuclear.o Medium-term targets should be set in the 10–20 year timeframe after enactment to match up with and enable technology development (e.g., new nuclear, CCS, etc.).

For what can be done in the near term with efficiency and renewables, see “If Obama stops dirty coal, as he must, what will replace it? Part 1” and “If Obama stops dirty coal, as he must, what will replace it? Part 2: An intro to biomass cofiring.”

Cost-containment provisions should include a price collar, which would include a firm price floor and firm price ceiling. The collar should be based on the following principles:

o Start narrow and gradually expand over time as technologies become available.o Simplicity of administration and transparency on use of revenue (which should include funding technology development and limiting economic impacts).o Formulaic (i.e., easy to determine price for any point in time).

Offsets also are an important cost containment mechanism that should be allowed to the maximum extent practical, subject to monitoring, measurement, appropriate third-party verification and regulatory oversight.

While I am not a fan of either cost-containment approaches (see “A safety valve in Lieberman-Warner is senseless” and “You can call a rip-offset a CDM project, but it’s still a rip-offset”) — I do think at least one of them is inevitable. But I think progressives should worked very hard to make sure that you don’t have both. The rip-offsets are probably better than a safety valve since they are at least partially subject to oversight and foreign countries love them and won’t think they are weakening our targets at all.

Under a federal GHG cap-and-trade program, allowances should be transferred to the power sector from the oil and gas sector as the market share of PHEVs and EVs increases.

Interesting that they would include this, but since it is difficult to see how PHEVs are going to be a big new source of generation requirements until 2020 at the earliest (even if 1 million are on the road by 2015), I don’t think the power sector (or the oil and gas sector) should have many allowances by then in any event.

The best way to mitigate impacts on customers is to flow-through the benefits of allowances to customers. This can best be achieved by having allowances for regulated utilities allocated at the LDC level — a process that would be overseen by the state utility regulators — with appropriate adjustment to address impacts on unregulated generators.

o Allowances should be allocated in the early years of a climate program, with a gradual transition to a full auction.o The initial allocation to the electric power sector should be consistent with its level of CO2 emissions (i.e., 40%).o Sector allowances should be allocated as follows: merchant coal generation would receive allowances equal to 50% of base-year emissions (because it is assumed both that the other 50% is recovered by gas being on the margin in competitive markets and that gas has, on average, 50% of the carbon content of coal), with the balance of allowances allocated to LDCs based on an even split between base-year emissions (including emissions associated with purchased power) and retail sales. This approach is referred to as the “50–50–50” proposal.

It’s easy to understand why they want all these allowances, but it is just not a good idea (see Obama tells Business Roundtable: “If you’re giving away carbon permits for free … it doesn’t work” and Obama, cap-and-trade, and voodoo economists). I will blog more on allowing his giveaways next week.


I’ll end by excerpting a fascinating E&E Daily (subs. req’d) article on “Power companies bring fragile coalition to cap-and-trade debate” (AEP letter here):

The electric utility industry is clinging to an agreement for global warming legislation that puts 60 of the country’s biggest investor-owned companies on record supporting a complex credit allocation system that bridges the historic divide between generators of coal, natural gas and nuclear power.

It is a fragile coalition with a steady supply of skepticism among its members as they gear up for a high-stakes political battle with Congress and the Obama White House.

“I think we’re still together,” Ralph Izzo, the president, chairman and CEO of New Jersey-based Public Service Enterprise Group Inc., said in an interview last week. “I’d love to know if we’re not.”

Sure enough, there are signs the group’s consensus position — organized by the Edison Electric Institute trade group — may be in trouble.

Michael Morris, the president and CEO of Columbus, Ohio-based American Electric Power Corp., triggered some headaches among his rivals earlier this week when he sent a letter to members of Congress that reverted to his company’s original position in favor of free allowances based on historic emissions — a system beneficial to coal-fired utilities.

“He’s violating the spirit of the agreement,” exclaimed one electric utility industry official close to the process. “More than just the spirit. He’s violating one of the core principles of the agreement.”

AEP officials blamed an innocent editing error and said the company had not departed from EEI’s stance. The whole point of Morris’ letter, they explained, was to take issue with President Obama’s plan to auction off all emission credits, a plan the utilities oppose.

Yet the AEP flap may be a sign of things to come. Several other EEI members can expect pressure as the climate debate unfolds, especially participants in the U.S. Climate Action Partnership, a high-profile coalition lobbying for a cap-and-trade bill that includes other big corporations and a few mainstream environmental groups.

The U.S. CAP stance is similar to EEI’s position when it comes to emission allowances, but it goes into greater detail for how the new revenue should be focused on energy efficiency programs and direct rebates to consumers.

David Doniger, policy director of the Natural Resources Defense Council’s climate center, said five power companies — Duke Energy Corp., Exelon Corp., FPL Group Inc., PG&E Corp. and PNM Resources — have all agreed to side with U.S. CAP should it differ during the legislative debate from the EEI approach.

Other EEI members may also have a tough time holding on to the agreement. Izzo still ticks through the arguments from PSEG’s earlier position that favored giving electric utility companies free credits based on how efficient they were, an approach most beneficial to natural gas and nuclear power generators.

“The logic there was if you really want to motivate people to act differently, then there’s no finer way to do that than to motivate investors to act differently,” Izzo said. “The thought was you issue credits based on what you want people to produce as opposed to what you don’t want them to produce.

“I quite candidly still prefer that approach,” Izzo added. “But I realize it’s not acceptable.”

Better to speak with one voice?

EEI’s CEO leadership first unveiled legislative principles on global warming in early 2007 as Democrats took control of the House and Senate promising action on climate change. The trade group at the time stayed away from specifics, calling instead for the creation of a “long-term price signal for carbon.”

But over the last 18 months, the group got serious at the behest of former House Energy and Commerce Chairman John Dingell (D-Mich.). “Congressman Dingell made it quite clear that we’d have much more potential effect with a consolidated position rather than 14 fractured positions,” AEP’s Morris said in an interview.

About 25 CEOs traveled across the country for weekend meetings on a more specific proposal, with officials from Richmond, Va.-based Dominion Energy credited with running the analytical work. EEI officials also took note that Obama had emerged as the Democratic presidential nominee with a campaign pledge far more aggressive than anything they were prepared to offer.

Ultimately, EEI this January released a plan that finds a sweet spot between its many different members’ interests, while also taking into account many of the concerns that have long been raised about giving away free credits to industry. For starters, the utilities seek 40 percent of the cap-and-trade system’s emission credits for free. They picked 40 percent because that is the industry’s contribution to the annual U.S. greenhouse gas inventory.

EEI also tried to address concerns that their member companies were trying to make windfall profits by turning around and charging their customers for the allowance values they would receive for free. This approach helped to discredit the early pilot years of the European Union’s trading system for greenhouse emissions. Here, EEI suggested Congress give a vast majority of the credits to regulated, retail local distribution companies that deliver electricity to households across the country.

Windfall profits would not be possible under the new EEI approach because the distribution companies all have to answer to state regulators, Izzo said. “We’re rate-regulated companies,” he said. “Our investors like us because we’re pretty stable investments. Not because we make astronomical returns. So you’d have a situation where rates went up and a company was making lots of money and that would pretty easily invite the attention of whatever federal oversight existed.”

For emissions credits, EEI also split the difference between the coal and the nuclear and natural gas companies. Fifty percent of the sector’s allowances would be given to local distribution companies based on half of their base-year emissions and half of their retail sales. Merchant coal generation would also get the remaining share of the allowances based on half of their emissions.

Distributing allowances at the local level would be “quicker, cheaper and more efficient” in mitigating the costs of carbon for electric customers, said EEI President Tom Kuhn.

No matter what, the cap-and-trade system will increase electricity bills. Users of coal can expect rate increases of between 40 percent and 60 percent. Natural gas rates may go up around 20 percent. But Kuhn said that under the EEI approach, the local distribution companies will take the value of the credits and use those funds to help offset the price spikes. “There will be regional disparity,” Kuhn said “I don’t care what state you’re in, it’s going to increase your rates somewhat. This is designed to help everyone.”

Utility executives maintain that the state regulators will do a sound job in dishing out the money to help customers. Environmental groups are also supportive of the local distribution company concept so long as Congress includes specific conditions for regulators to follow.

“One key element of this plan would be strict oversight provisions to leave no doubt for what it is to be used for and what not to be used for,” said Jeremy Symons, vice president of the National Wildlife Federation. “If protecting consumers is the purpose, it better be in the legislation and there shouldn’t be loopholes.”

Leaning on Obama and the Democrats

The EEI proposal has started making the rounds within the Obama administration and on Capitol Hill, even with some traditional opponents of the electric utility industry.

House Energy and Environment Subcommittee Chairman Ed Markey (D-Mass.), who along with Energy and Commerce Chairman Henry Waxman (D-Calif.) is spearheading the climate bill in the House, addressed utility executives last week during their annual conference in Washington.

“Obviously, it’s not easy for them to put together a position that everyone agrees on,” Markey said in an interview. “I accept it as a good attempt at putting together an initial offering. I think we’re going to try to work with it and find something that in the end will work for all parties.”

The utility executives said they tried to emphasize the delicate nature of their agreement as they spoke with Markey. “I think the chairman has been in the political process for a long period of time and understands that the challenge here is to get a policy outcome that can garner enough support to get through the Congress,” said David Ratcliffe, the chairman and CEO of Atlanta-based Southern Co., one of the country’s largest electric utilities.

The power companies also were optimistic after hearing Obama discuss climate change at last week’s Business Roundtable event. Obama said he hoped to strike the “right balance” with industries concerned about his climate proposal. “We are not going to be able to move this in an effective way without partnership with the business community,” Obama said.

Ratcliffe and Lew Hay, the chairman and CEO of Juno Beach, Fla.-based FPL Group Inc., read Obama’s comment as a signal of a willingness to negotiate on the 100 percent auction.

“I’d say more than a little bit,” said Hay, who originally supported a 100 percent auction, but conceded for EEI’s sake that it did not need to start that way. “I think he signaled pretty strongly that he’s a practical man. He’s heard loud and clear that a 100 percent auction right out of the gate isn’t going to work. It’s not going to be politically acceptable and therefore it won’t pass.”

Indeed, there appears to be a growing consensus that Obama, Democrats and the utilities will meet somewhere in the middle. EEI’s position calls for a phase out of the free credits and a transition to an auction, without spelling out a specific date. Izzo said the complete auction could happen in about a decade.

“I think many people have said before that politics is the art of compromise,” Ratcliffe said. “So that would say that we’d wind up somewhere between our two points.”

Some Democratic lawmakers sound like they are on the same page as well. “What I’m concerned about is there’s a 100 percent auction, there’s a zero percent auction and there’s a long way in between,” said Rep. Tammy Baldwin (D-Wis.), a member of the Energy and Commerce Committee. “And so what I’m curious about is whether we’ll get to a point where we’ll look at in between the extremes.”

‘A healthier debate’

Environmentalists are not thrilled with the electric utility industry’s call for free credits, no matter how much work they have put into their consensus position.

John Passacantando, executive director of Greenpeace USA, wants to keep Obama’s 100 percent auction in place, with hundreds of billions of dollars in revenue headed back to taxpayers and other high priority, climate-friendly items. “Let’s help American families by … drum roll please … helping American families,” he wrote this week in his blog. “Not by giving their money to big polluters. Let’s be logical, honest and fair.”

If Obama compromises, Passacantando added, “we will witness one of the great shakedowns in history. Hundreds of billions of dollars will flow in a straight line from working families into corporate coffers.”

Yet other environmental groups say they are willing to give EEI some breathing room now that they have moved away from their position insisting on free credits based on historical emission levels. “I think that’s a healthier debate for Congress to be having than the old debate about whether or not companies should be entitled to emission allowances because they polluted in the past,” said Symons of NWF.

Two months since they unveiled their proposal, several of the utility officials acknowledge they have not done a very good job explaining their new stance. One problem: The EEI rollout came within hours of a U.S. CAP press conference on Capitol Hill that was timed to coincide with Waxman’s first hearing on global warming after taking over Dingell’s committee chairman position.

Several Energy and Commerce Committee members last week said they had not been contacted by any EEI members, or they were just now learning about the industry position.

For example, Rep. Rick Boucher (D-Va.), who used to head the subcommittee with jurisdiction on climate issues, pulled a copy of the two-page EEI document from his inside suit pocket, saying he would soon read it for the first time. Until then, he declined comment.

As for Republicans, Rep. John Shimkus of Illinois said he does not trust the utilities. “I’m not sure Jim Rogers is speaking for the coal companies,” Shimkus said, referring to the chairman and CEO of Duke Energy Corp. “I’ve talked to these guys. I think U.S. CAP is trying to get in bed to limit the damage. I think they’re trying to save whatever equity they have left in their companies in this regime that could run them over.”

Several of the electric utility CEOs said they are just now ramping up their lobbying campaign as it appears the climate legislative debate has legs. “We’re at a point where people are beginning to listen to these concepts with a good deal more attention,” said Ratcliffe. “Obviously, I wish that there’s better understanding. But that’s a job we’ve got to do.”

Izzo credits Obama with putting the climate debate at the center of his agenda. “He’s got this amazing ability or desire to keep a lot of critical priorities moving,” he said. “And this is one of them.”

But Izzo also acknowledges his industry faces challenges going forward in holding together amid criticism from environmentalists, and even their own. “This is a complicated subject,” Izzo said. “It’s one that’s very vulnerable to unfair sound bite criticisms. ‘Windfall for companies.’ ‘Transfer of wealth from poor starving region A to affluent region B.’ ‘It’ll decimate the economy.’ Those are going to be the quotes we’ll hear for the next year or what it takes to get this done.

“What we have to point out to people,” Izzo added, “is I think this is a masterful blend, a combination of ‘polluter pays, minimized customer impacts, phase in, but don’t wait for technology.’ And get the darn cap and get action under way so we don’t worsen the situation.”