As the House Energy and Commerce Committee begins holding hearings on the Waxman-Markey climate and energy discussion draft this week, one issue that will be debated is the allocation of emissions credits. During today's OnPoint, Richard Morgan, a commissioner of the District of Columbia Public Service Commission and leader of the National Association of Regulatory Utility Commissioners' Task Force on Climate, explains why he believes local regulated utilities should be allocated emissions credits from a cap-and-trade program. He discusses the role state public utility commissioners can play, and addresses how Congress can find the balance between auction and allocation.
Monica Trauzzi: Welcome to the show. I'm Monica Trauzzi. Joining me today is Rick Morgan, a commissioner of the District of Columbia Public Service Commission and leader of the National Association of Regulatory Utility Commissioners Task Force on Climate. Commissioner, it's great to have it on the show.
Richard Morgan: Thank you very much.
Monica Trauzzi: Commissioner, as Congress returns from recess, climate talks are expected to heat up in both the House and Senate. One of the biggest issues that's up for debate is the allocation of emissions credits. What role do you believe state public utility commissioners can play in the allocation and distribution of these credits?
Richard Morgan: Well, the allocation decision is really going to be made by Congress, but utility commissioners around the country and in all 50 states and the District of Columbia can play a role in making sure that we minimize the economic impact on consumers of utility services. That's where the biggest hit is likely to be because that's where most of the emissions are coming from, from the generation of electricity. And if we do this right we can really make it a lot easier as we transition toward a carbon constrained world.
Monica Trauzzi: There are those who say utilities are not well-suited for providing consumers with relief from the high energy prices that may come as a result of the cap and trade. Why do you feel, well, what's the distinction between the private sector and what they might do and what your folks might do?
Richard Morgan: Well, we think that utilities are actually very well-suited if we do it right. The utilities, they are private companies in many cases, but in all cases they are under some kind of rate regulation. They can't just set prices wherever they want and, in fact, as utility regulators we're obligated to pass along to consumers any of the benefits of free emissions allowances that these regulated utilities might receive. But it's important that these benefits have to go to only the local distribution companies which are regulated in every instance in the U.S. and not to other types of electric companies like the merchant generating companies for example that would not be under any obligation to pass along those benefits to consumers.
Monica Trauzzi: What are your thoughts about proposals that we've seen so far that would put the control in the government's hands and they would be able to provide relief to consumers on a tax basis?
Richard Morgan: Well, that's another way of doing it and I know that President Obama had proposed the approach of a 100 percent auction. What you would get in that case is a big hit on consumers' utility bills and then they would get benefits returned to them through the tax system. But it wouldn't necessarily put the benefits back exactly where the money came from out of consumers' pockets. And eventually we do, as regulators, support the idea of a 100 percent auction, but we think we need a transition period to sort of phase in the impacts of this approach. And during that interim period we think it makes sense to return some of the economic benefits back to the very consumers that are going to be paying the bill for putting a price on carbon.
Monica Trauzzi: But would this be like corporate welfare as OMB head Peter Orszag has said?
Richard Morgan: Well, I think that Mr. Orszag was correct in a sense because if you just simply giveaway allowances for free to a private company, it very well may wind up going to their shareholders rather than consumers. But in this case, where you have the utilities that are strictly regulated on their price by public service commissions or other regulatory authorities, we not only can make sure, we're obligated to make sure that anything of value that they receive has to be reflected in the rates that they charge. And there are a couple of things that we can do. Number one, we can use these funds to lower their rates or we could direct the funds to be spent on energy efficiency programs, low income assistance, or perhaps research on new clean technologies to help us find better ways to address the climate situation.
Monica Trauzzi: Looking at Europe as an example, too many credits were handed out there which ended up creating windfall profits for utilities. So how does Congress find that balance between auction and allocation?
Richard Morgan: Well, we haven't specified what exactly the right balance is. I think we want to start out more toward an allocation of free allowances and move toward an auction over time, I would say at least a decade, perhaps a little bit longer. And we can avoid the problem that happened in Europe. Yes, they had too many allowances, that's one problem. We want to avoid that. The other problem was that they gave away the allowances without any strings attached. And I'm not proposing that we do that at all. The allowances should only be given to entities that are price regulated, where they can't just simply pass along these free allowances as profits to their shareholders. If their price is controlled, we make sure that the price is set in a way that reflects the value that they've received in free allowances. And then consumers will receive those benefits simply as an offset against the higher prices that they're paying. So, in effect, what we're doing is recycling the higher cost that people would pay in their utility bills back to the very customers who are paying those higher prices, so that it basically reduces the impact on those consumers.
Monica Trauzzi: What's your take on the Waxman-Markey climate energy draft? It's absent of specifics on revenue and allowances. So how do you see the debate over these items playing out as this draft makes its way through the committee?
Richard Morgan: Well, I think it's a good sign that the Waxman-Markey draft hasn't decided exactly how we're going to deal with allowances. This is a very important question. It's central to whatever we do with a cap-and-trade system. The administration, while they initially put out their markers saying we'd like to have 100 percent auction, they are indeed showing flexibility recognizing that politically that may be some pretty strong medicine to start there. So I think there's some willingness to compromise, there's some flexibility and certainly some willingness to listen to various viewpoints on this issue. As I said, we do support an auction as where we all want to wind up. It's just a matter of how we want to get there. And, indeed, as utility regulators have an important voice here, I've been invited to testify at a hearing in the House next week on behalf of our national association NARUC to talk about this very issue.
Monica Trauzzi: All right, we will end it right there on that note. Thank you for coming on the show.
Richard Morgan: OK, well, thank you.
Monica Trauzzi: And thanks for watching. We'll see you back here tomorrow.
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