Leaders from an influential electricity group decided last week to seek an increase in the free carbon allowances the industry would receive under proposed climate legislation. The hope is to heal a serious split with coal-dependent Midwest utilities.
Chief executives from member companies of the Edison Electric Institute settled on the strategy at a Sept. 8 meeting as a means of unifying the industry behind potential legislation in the U.S. Senate. They also are studying designs for a price "collar" that would put upper and lower limits on carbon costs under a cap-and-trade program.
"As a group of EEI CEOs, we've agreed to take this time to try to strengthen the economic modeling" of the allocation plan, said Thomas King, president of National Grid U.S., who attended the September meeting of the executives in Colorado Springs, Colo. "We need to understand the coal concerns and the economics involved so that when we get back to the debate, we are even stronger."
In a mandatory cap-and-trade system like the one set up in a global-warming bill that passed the House in June, businesses must hold a restricted number of carbon allowances representing their emissions. If they spew more than the allotted amount in a given year, they must pay extra for more allowances.
EEI helped craft a complex blueprint for the utility sector in the House bill, which was sponsored by Reps. Henry Waxman (D-Calif.) and Edward Markey (D-Mass.). The formula allocates 35 percent of carbon allowances freely to power generators. Now, EEI is making a renewed push to hike the proportion to 40 percent.
"There was no formal vote taken; it wasn't that kind of meeting," said EEI spokesman Jim Owen. "But there was a generally held view that returning the utility sector allowance to 40 percent, or something close to that, would absolutely be a help" for coal-state companies.
Pressure from the Midwest Climate Coalition
EEI executives are hoping to win the final support of the Midwest Climate Coalition, which is led by MidAmerican Energy Holdings Corp. and other smaller power producers. MidAmerican said the House bill could raise its customers' electric rates as much as 25 percent, lending support to Republican protests about the legislation's likely economic impact.
In an interview Friday, the director of the coalition, Zachary Hill, said that Midwestern utilities need more allowances to cover their high emissions from coal. He also warned that keeping the allocation at 35 percent could spur price volatility in the carbon markets, since the utilities would have to buy so many new allowances.
"If you give us more allowances, we'll make sure we use those to reduce the rate impact to our customers," said Hill, who also is a senior manager for federal affairs at Alliant Energy Corp., a member of the coalition.
Yet many green groups and consumer advocates are concerned about tweaking the climate blueprint. Doing so would risk unraveling an entire business and environmental coalition that got behind the 35 percent number, in their view, and would spur requests from companies everywhere for more free allowances.
Others already dislike the way the existing formula gives power to utilities to redistribute money to consumers. Those critics say an increase in that power via a 40 percent allocation would make matters worse.
"I don't want to see utilities to be controlling more chunks of the pie," said Tyson Slocum, director of the energy program at Public Citizen, a watchdog group. He said the regional issue could be addressed by distributing more allowances based on historic emissions, which would automatically provide more allowances to coal-dependent utilities.
The House plan, by contrast, distributes allocations based evenly on historic emissions and retail power sales. The executives don't want to tinker with that part of the formula, King said.
Another group opposed to upping the percentage, the Center on Budget and Policy Priorities, recently released an analysis arguing that an increase would hurt consumers more than it would help them.
"The Senate should look skeptically at these claims as it drafts climate legislation and should resist requests to increase the allocation to electricity utilities or to delay its phase-out," the center's Chad Stone and Hannah Shaw wrote.
It's not clear where an additional 5 percent of allowances would come from. In the House bill, 85 percent of allowances are slated to be distributed freely initially, with 15 percent auctioned. A change would mean that some groups would have to give up free allowances, or fewer allowances would be auctioned overall.
Formula fights won't be pretty
"When you start having formula fights over who gets what free stuff, it's going to get messy," Slocum said. "It's going to be a lobbyist love affair."
Furthermore, a group of utilities that rely more on nuclear and renewable power are fighting back against the possibility of changes in the EEI formula and are claiming that an increase in allowances would reward "dirty power plants" (E&E Daily, Sept. 16).
Even as climate legislation appears stalled in the Senate while the chamber considers health care, many observers believe that opposition from coal-dominant states could make or break a climate bill in the chamber in the end.
"Listening to the Midwestern utilities could be a savvy move, because it would take some heat off Midwestern senators who might be on the fence with regard to climate legislation," said Kenneth Green, an analyst with the conservative American Enterprise Institute.
The EEI group will press the Senate to ease the climate emission limits and timetables in the House legislation, as well, Owen said. "They feel those are very aggressive thresholds. The costs issues could be mitigated if you extend the thresholds."
Yet it isn't clear how much influence group members have, despite their major role in the House debate.
King said the members have agreed to "take a deep breath" and try. "We don't want to run the risk of having it killed," he said.