September 30, 2009

Cap and Trade Allowances: Windfalls Or Wind Farms?

BY GREGORY E. ABEL and GLENN ENGLISH

COMMENTARY

The commentary No ‘Cash for Clunkers’ in Climate Bill (in the September 15 issue of The Energy Daily) creates a fictitious history of climate change and seriously harms good faith efforts within the industry to address the legitimate issues many utilities have raised with the Waxman-Markey bill.

Let’s be perfectly clear: the utilities calling for changes to Waxman-Markey support emissions reductions. The simple fact is that the switch to low- and zero-emission technologies won’t happen overnight, and it won’t be cheap. The problem is exacerbated by Waxman-Markey’s allowance allocation formula, which rewards companies with fewer CO2 emissions and leaves more coal-dependent utilities with significant allowance shortfalls. Our aim is to prevent a double cost to our customers: the cost of allowances (which will do nothing to reduce emissions), and the cost of the new infrastructure, including the renewable energy needed to actually reduce emissions.

We will not support the passage of legislation that causes our customers to spend their hard-earned dollars on unfair allowance allocation formulas that send millions of dollars to those who do not need them to address climate change. Moreover, the Edison Electric Institute made clear in letters to Senate leadership that they cannot support the bill without having a number of key changes made to it.

We and other utilities—both large and small—have raised questions about the bill’s allocation formula, which is split 50-50 between emissions and retail sales. Why? Because free allocations based on retail sales will create a financial windfall for companies with large nuclear or hydro resources. Those resources don’t emit greenhouse gases, so they don’t need allowances to comply with the law.

Moreover, giving away windfall allowances through an inequitable allocation formula reduces the available allowances for utilities that do need them to be in compliance with the law. This drives up customers’ costs and inappropriately transfers wealth from customers of primarily coal-based utilities to those of utilities that are less carbon-intensive.

This situation was avoided under the successful acid rain program, which did not distribute sulfur dioxide allowances to nuclear and hydro units—for the simple and obvious reason that these units did not emit sulfur dioxide, had no compliance obligations and, therefore, did not need allowances.

Let’s set the record straight: no nuclear plant was built to save the planet, and no coal plant was constructed to melt the ice caps. Utilities that built nuclear plants in the 1960s and 1970s did not do so to avoid greenhouse gas emissions, and there is no reason to provide them with a financial windfall.

And as far as these self-declared “forward-looking power companies” are concerned, not one of the “Cash for Clunkers” authors has built a nuclear plant during their tenure with their utility.

Furthermore, so-called clunker coal plants in the Midwest were authorized by state utility commissions pursuant to laws existing at the time of approval. These plants were found to be in the best interests of our customers at that time, and they should not be penalized now for past prudent decisions that have resulted in low-cost electricity.

The authors assert that in the states where their customers live, a typical monthly electric bill averages $106, while in coal-burning parts of the country it is as low as $65. What’s the solution for their higher cost structure? Use the Waxman-Markey bill to moderate their customers’ bills. How? By raising our customers’ bills!

Let’s not rewrite history and pretend that the utility investments in low- and non-emitting power generation three and four decades ago anticipated climate change and should therefore be rewarded. A climate change bill should not pick winners and losers—and Waxman-Markey would do just that.

It’s difficult to swallow the argument about industry compromise when one of the companies represented in the “Cash for Clunkers” commentary will add about $750 million to its annual revenues for every $10 per metric ton increase in the price of carbon dioxide allowances under the bill.

Rather, let’s develop a fair allocation formula that avoids windfall profits, provides allowances to utilities that will be forced to take major actions to reduce their emissions, rewards early action once the program starts, avoids wealth transfers between utilities—and most importantly—actually ensures investment to reduce greenhouse gas emissions.

—Gregory E. Abel is president and CEO of MidAmerican Energy Holdings Company, whose utilities serve more than 3 million retail electric and gas customers in 10 states. Glenn English is CEO of the National Rural Electric Cooperative Association. NRECA represents the nation’s consumer-owned electric cooperatives, which provide electric service to more than 42 million people in 47 states. The combined organizations serve greater than 13 percent of the United States electric market.

No 'Cash For Clunkers' In Climate Bill

COMMENTARY

BY LEW HAY, RALPH IZZO, TOM KING, JOHN ROWE and MAYO SHATTUCK

Certain small utilities with some of the nation’s highest carbon dioxide emission rates want to change the climate bill pending before Congress to give themselves more allowances to emit carbon dioxide (CO2). This would be the ultimate “cash for clunkers” program for dirty power plants, with one key difference: Unlike the real program, in this case the clunkers would get to stay on the road. The Senate should reject this change.

Under the House version of the legislation, known as the Waxman-Markey bill, the electric power sector would initially receive an allocation of allowances roughly proportionate to the industry’s carbon emissions. As the chief executive officers of low-emissions power providers, two elements were critical to our support of this provision: First, that the full value of the allowances would go to customers. And second, that the allowances would be distributed fairly between high-emitters who burn more coal and low-emitters who have invested in clean energy.

It is the second of these provisions that is now threatened by various small, coal-based power companies that want to re-write a carefully crafted compromise to grab more allowances for themselves.

Power plants are not that different from cars. The efficient ones have low emissions while the clunkers spew lots of CO2 into the atmosphere. Some of the high-emitters in the electric power sector are arguing that the clunkers should receive twice as many emissions permits as the efficient plants. In other words, the dirtier you are, the more allowances you get. If you are looking for a system that rewards those who pollute the most and penalizes those who emit the least, this is it.

Such an approach would be fundamentally unfair to the customers of clean utilities, who are already paying to address climate change in the form of higher prices for lower-emissions electricity. In the states where our customers live, a typical monthly electric bill averages $106. In parts of the country that burn cheap, high-emitting coal, it is as low as $65.

Even with a price on carbon, customers of predominantly coal-based utilities would still pay lower rates than customers of clean utilities. This price advantage would be greatly exacerbated if the Senate chooses to give the coal-based utilities twice the emissions permits of their cleaner counterparts.

The issue is one of basic fairness. Giving the lion’s share of allowances to high-emitters punishes the customers of those companies that have done the most to tackle climate change. It’s the equivalent of taking the tax credit away from those who drive a Prius and giving it to those who drive a 1960s muscle car.

Of the 934 coal units in this country, 549 of them—or nearly 60 percent—are at least 40 years old. They are fully depreciated, fully paid for, and by far the biggest emitters in the industry, churning out almost 20 percent more CO2 than new coal plants and 185 percent more CO2 than new natural gas plants. It is high time such units were retired. Yet under a system that distributes allowances based on how much power plants have emitted historically, the companies that run these plants, and their customers, would reap rewards.

Forward-looking power companies have modernized aging fossil fuel plants, switched to cleaner fuels, enhanced the efficiency of our nuclear fleets, promoted conservation and efficiency, and invested in renewable energy. The result: In 2006, the last year for which industry-wide data are available, our collective CO2 emissions rate was 574 pounds per megawatt hour, compared to an industry average of 1,310 pounds per megawatt hour.

Within the electric power industry, we were willing to meet coal-based utilities in the middle as part of a compromise brokered by our national trade group, the Edison Electric Institute. Half of the allowances would be allocated based on a company’s historical emissions, favoring customers of coal-based utilities. The other half would be based on retail energy sales, which benefits the customers of clean-energy companies that produce more megawatts per ton of emissions.

This compromise respected the fact that coal is an important energy source for America and that coal-based utilities will have to make significant investments to clean up their fleets. At the same time, it respected the significant investments that cleaner power companies have already made and that our customers are paying for today. That’s why it was adopted as the allocation formula in the Waxman-Markey bill.

Giving more emissions allowances to dirty power plants than they will already get under the Waxman-Markey bill has no place in sound climate legislation. It runs the risk of allowing these energy clunkers to stay on the road for years to come instead of trading up to cleaner power.

—Lew Hay is chairman and CEO of FPL Group; Ralph Izzo is chairman, president and CEO of Public Service Enterprise Group; Tom King is president of National Grid U.S.; John Rowe is chairman and CEO of Exelon Corp.; Mayo Shattuck is chairman, president and CEO of Constellation Energy. Collectively, the companies serve nearly 16 million customers and generate 11 percent of the nation’s electrical power.