Friday, January 01, 2010

Fairness To Ratepayers Under A Cap-and-Trade System

The Center responds to Dan Watkiss, partner with Bracewell & Giuliani (Washington, D.C.), in his analysis of the effects of the Waxman-Markey cap-and-trade legislation on ratepayers.

The Center supports Waxman-Markey and Boxer-Kerry.

Under Waxman-Markey, the federal government sets a declining cap on overall emissions and issues tradable allowances that authorize holders to emit a metric ton of carbon equivalent within the cap. Those that reduce emissions more cheaply may sell extra allowances to others that otherwise must pay more than the price of an allowance to comply.

The Center supports the market-based cap-and-trade approach to reducing greenhouse gas emissions. We supported the Bush admistration's Clear Skies Initiative too because it utilitized cap-and-trade in seeking to achieve reductions of NOx & SOx emissions. Unfortunately, litigation killed its implementation at the regulatory level just as litigation will kill the Obama administration's regulatory approach to CO2 emissions in the absence of backing Congressional legislation.

Waxman-Markey sets interim caps and an ultimate cap to reduce GHG emissions 80 percent below 2005 levels (7.2 billion tons of CO2) by 2050. The electric power industry—responsible for 40 percent of U.S. GHG emissions—is allocated just more than 35 percent of total allowances from 2012 to 2025.

The optimal result of choosing allocation over auctioning or otherwise selling allowances should be to subsidize the cost of transitioning from high carbon emissions for those most dependent on processes that emit high levels of GHGs.

The Center supports the free allocation of allowances and opposes auctioning. Auctioning will only increase the cost to ratepayers and a rebate system is unnecessarily bureaucratic and burdensome. Ratepayers are going to subsidize the transition anyway.

Waxman-Markey distributes allowances to the electric power industry in two ways:

1) Distributes allowances ratably based on the annual average CO2 emissions attributable to a local distribution company’s electricity delivered during a base period (2006-2008 or three consecutive years between 1999 and 2008).

2) Distributes allowances ratably based on a local distribution company’s annual average retail electricity deliveries for the same alternative base periods, adjusted over time for changes in the size of the company’s franchise.

This approach is reasonable. The regression analysis baseline also provides a good barometer for considering other externalities, such as best available control technologies and social justice issues.

A distribution of allowances based purely on retail sales untethered to historical dependence on GHG-emitting resources is not defensible and could erode the political will to enact a cap-and-trade program that applies to all major emitting sources within the electric power industry. Rather, it transfers wealth from customers of coal-dependent retail electricity providers to customers of other providers less dependent on coal.

Yet isn't there a great opportunity for wealth generation via emissions reductions by coal-fired power plants? In fact, states such as New York that benefit from hydro and nuclear power are concerned that they will be penalized for already reducing emissions, thus not having the opportunity to reduce emissions and benefit from banked allowances.

It strains credulity to argue that ratepayers of distribution companies that have relied on coal-fired generation deserve a lesser share of allowances than they need to transition to their mandated emission reductions as some form of moral judgment on their historical fuel choices. Their service providers, without ratepayer input, chose coal because it was close and cheap. Utilities built hydroelectric dams and nuclear plants for the same reasons, not to limit GHG emissions.

Of course, these same coal ratepayers have benefitted from lower kilowatt-hour rates as a result of these choices. Whereas New York City has the highest rate in the country. And it will be very expensive to build the nuclear plants needed to most effectively reduce emissions while providing the electricity we need. Doesn't this equalize the extra cost coal utilities will have for reducing CO2 emissions?

Utilities invested in generating technologies because of availability, cost or both. GHG controls should not create unjustified, inequitable wealth transfers among ratepayers.

Such transfers, regardless of results, will be market-based. The market created high electricity rates in New York (16.97), Connecticut (18.30) and Hawaii (22.19) and low electricity rates in Wyoming (6.29), West Virginia (6.63) and Idaho (6.80) - - (Nebraska State Gov). The CO2 emissions/electricity deliveries scenario of Waxman-Markey cannot necessarily provide some sort of ratepayer fairness with such a resource/price history.

Unprincipled wealth transfers in connection with GHG controls could deprive the proposed cap-and-trade program of political legitimacy.

Wealth transfers are inevitable in a market-based cap-and-trade system. Some consider the market to be unprincipled, but it can work if not burdened with too many confounding regulations.

Waxman-Markey requires recipients of allowance distributions remit the proceeds in lump-sum payments to their rate-regulated customers.

We oppose this unnecessary, bureaucratic and burdensome system. Let the utilies utilize monetary proceeds for best available control technologies or practices.

This should correct allocated allowances based on the annual average CO2 emissions attributable to delivered electricity from becoming a subsidy for increased consumption from GHG-emitting resources.

It is unnecessary interference in the trading system. If anything, duplicate the EPA Acid Rain program whereby 'anyone' can hold and trade allowances. Give the ratepayers a stake in the market approach.

To make the program environmentally and economically effective and politically viable, those who will shoulder the greatest cost in achieving the capped emissions should be the primary (if not exclusive) beneficiaries of freely distributed carbon allowances during the transition to a carbon-capped economy.

Political viability is a moving target. Electricity rates will need to increase regardless of whether America decides to address CO2 emissions. Such increases by their very nature are not politically viable. Technology should be more of a driver of CO2 emissions reductions to the greatest extent possible.

(Electric Light & Power, Cap-and-Trade Success Requires Ratepayer Fairness in Distribution of Emission Allowances, Nov/Dec/2009)

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