The feuding clans of the electric power industry are quarreling over newer ground: which of them most deserves the free carbon emission allotments that would be distributed if the House-passed climate bill became law.
An unlikely alliance of public power providers, electric cooperatives, utility consumer advocates and utility commissioners joined together yesterday to attack the allotments provision of the House bill that they say would give windfall profits to merchant power providers with no assurance that the funds would be invested in reducing carbon dioxide emissions.
"The current provisions basically amount to a $4 billion annual giveaway" to the merchant generators, said Mark Crisson, president of the American Public Power Association, citing a study by Synapse Energy Economics Inc., of Cambridge, Mass., that APPA helped commission. It was released yesterday.
Representatives of the merchant generators immediately fired back. "This comes down to the idea that they can force us to buy [carbon] allowances from them," said John Shelk, CEO of the Electric Power Supply Association. "They can't say that out loud, so they essentially smear us with the politically charged term of 'windfall profits.'"
The House cap-and-trade bill would create a new kind of currency -- potentially worth $50 billion to $100 billion a year at the start -- in the form of free carbon allocations that permit power generators and factories to discharge carbon emissions without penalty. As the cap tightens over time, companies that could not reduce their emissions would have to purchase allowances from other companies or make offsetting investments that reduce greenhouse gas emissions.
The coalition of "strange bedfellows," in the words of former Rep. Glenn English (D-Okla.), yesterday urged the Senate to eliminate the portion of the allocations earmarked for merchant coal generators, amounting to 5 percent of the total. Local electricity distribution companies would get 30 percent of the emission allocations. The merchant share was added near the end of the House deliberations to secure more votes from coal state representatives.
Nuclear a likely big winner
Frederick Butler, president of the National Association of Regulatory Utility Commissioners (NARUC), said the allocations given to the local power distribution utilities, power co-ops and public power companies would be closely overseen by local regulators and boards.
"These rate-setting authorities can ensure that any benefits from the free allowances will be returned to consumers either through lower rates, investments in energy conservation and energy efficiency, or clean energy programs," he said. "The allocation of no-cost allowances to unregulated merchant generators will result in windfall profits with no corresponding consumer benefits."
English, CEO of the National Rural Electric Cooperative Association, said the merchant generators "are in a position to withhold those allowances [and] sell those allowances to pocket the money."
"Electricity consumers in states that are served by deregulated generators, with market-based rates, will pay much higher costs in the early years of a cap-and-trade program," said Sonny Popowsky, Pennsylvania's state consumer advocate, representing the National Association of State Utility Consumer Advocates.
Crisson and Popowski -- but not Butler -- said that part of the issue is the single clearing price method used to set spot prices in "deregulated" competitive electricity markets. The last increment of electricity needed to meet consumers' electricity demands in a given hour -- typically coming from the least efficient and most costly generator called upon -- sets the price that all generators receive for their power in that period. That creates windfalls for nuclear plants or renewable generators whose costs are far less than the market clearing price, they said.
"Nuclear power plants will receive literally billions of dollars ... even though they incur zero carbon compliance costs," said Popowski.
The second issue, they said, is the lack of a requirement that unregulated merchant plants use the value of the allowances to invest in carbon emission reductions.
Merchant power hits back
Representatives of the merchant power sector said those companies must build cleaner generation technologies in the years ahead to remain in business and are doing more today on the climate front than the co-ops, public power companies or regulated utilities.
It's not bad when power companies make money, Shelk said. "That's a good thing. We know we have to invest hundreds of billions of dollars in new, clean technologies."
"We already have the cleanest fleet in the country; the lowest emissions; more gas, more nuclear and less coal" than the rest of the industry, he said. "The idea that APPA and NRECA -- which are largely exempt [from the House bill] -- would be lecturing to the rest of us on benefits is pretty hard to take. They are a heck of a lot dirtier."
Shelk added, "It is really unfortunate that NARUC would put its name on such a report. It is supposed to represent all of us, and it didn't give [us] a chance to be heard."
The controversy has helped launch a new industry advocacy group in an already crowded field -- Generators for Affordable Power -- which represents the coal merchant generators, and includes Allegheny, Ameren, Constellation, Dominion, First Energy and Edison International.
Matt Most, managing director of environmental policy for Edison Mission, criticized the Synapse study on behalf of the coal generators group, saying Synapse assumed that the current generation breakdown among coal, natural gas, renewable and nuclear power would remain unchanged if cap and trade and a renewable energy standard became law.
"Clearly, the cost of carbon will make fundamental changes in how electricity is produced," said Most. Wind is going to continue to grow, and natural gas will displace coal, he said. "That is the very assumption this paper [Synapse's study] is avoiding."
Some industry experts said that the Federal Energy Regulatory Commission could, in theory, intervene if merchant generators were taking unfair advantage of the allotment program. But such an effort could run into the complex ownership arrangements that the merchant companies have for their various coal, nuclear and renewable generation sources, they added.