State regulators, utilities see advantages in mass-based approach to EPA rule

By Jeffrey Tomich | 10/20/2015 07:00 AM EDT

LITTLE ROCK, Ark. — U.S. EPA’s draft Clean Power Plan prompted concerns last year about a "dash to gas" — a wide-scale, costly build-out of natural-gas-fired generation to replace retiring coal plants.

The final plan issued Aug. 3, which is more geared toward facilitating emissions allowance trading, seems instead to be inciting another race — one toward mass-based compliance plans.

A key "threshold" decision facing state regulators as they look to begin crafting compliance plans — whether to choose rate- or mass-based approaches — dominated much of the discussion yesterday during a workshop here on the Clean Power Plan.


The daylong meeting was organized by the Bipartisan Policy Center and nonprofit Great Plains Institute. It is a follow-up to a similar conference in June that was hosted by the same groups (EnergyWire, June 8).

The earlier meeting produced broad agreement, even among groups that disagreed about many aspects of the rule, that multistate compliance with emissions allowance trading has benefits that could help bring down the cost of meeting the EPA-mandated carbon dioxide emissions reductions.

Yesterday’s workshop, similarly, suggested that many of the same groups have a preference for choosing a mass-based compliance approach under which a specific cap is set for CO2 emissions from a state’s existing power plants. Under the alternative rate-based approach, states would have to reduce emissions to a certain level, or rate, per megawatt-hour of electricity generated.

Mass-based approaches are generally viewed as preferable for trading because "it’s easier to administer and it is more simplistic," said Sandra Byrd, a vice president of Arkansas Electric Cooperatives Corp.

"It’s an easier way of quantifying the emissions reduction. And because it’s easier and because more folks are likely to choose it, it’s something that will be traded on a regional basis, which makes the costs lower for consumers," said Byrd, a former chairwoman of the Arkansas Public Service Commission.

Byrd said if the industrial sector gets allowances at some point, those could be added to the pool for trading purposes.

Coal-dependent states, especially, will see mass-based approaches as being most favorable because retirements of older, inefficient plants that are occurring regardless of the Clean Power Plant can be counted toward compliance.

Momentum for mass

Other state regulators, utility officials and representatives of grid operators PJM Interconnection and the Midcontinent Independent System Operator likewise said a mass-based approach is simpler, easier to administer and familiar for state air regulators, who have established similar emissions caps for other pollutants.

Byrd said the key advantage to a rate-based approach is that it more easily allows for economic development and electricity demand growth, which could mean increased CO2 emissions under a mass-based plan.

But Pam Kiely, senior director of regulatory strategy for the Environmental Defense Fund, said that shouldn’t be as much of a concern because the electric industry has been accommodating increased electricity demand for years while simultaneously reducing air emissions.

"I think the same can be true in the carbon context," she said.

Scott Weaver, manager of strategic policy analysis for Columbus, Ohio-based American Electric Power Co., said a rate-based approach could also make sense for Southeast states, such as Georgia or South Carolina, that are adding new nuclear generation. That’s because the additional carbon-free power would help lower the pounds of CO2 produced per megawatt-hour.

But Paul Sotkiewicz, a senior economic policy adviser to PJM, suggested there would be strong pressure for most states, including states adding nuclear output, to opt for a mass-based compliance strategy. That’s because states looking to benefit from selling emissions allowances are going to want the most liquid market and largest possible pool of trading partners.

Officials from regional transmission organizations have said they’ll be able to keep the lights on regardless of what approach states in their footprint choose. But a patchwork approach will be more expensive and complicated.

"We can manage to maintain reliability under a variety of scenarios," said Kari Evans Bennett, senior director of program strategy at MISO and a former Indiana utility regulator. "It’s just a matter of how expensive it would be."

States still in ‘think tank stage’

While state regulators have expressed a familiarity with simpler mass-based plans, they have been careful to say publicly that no decisions have been made.

Nancy Lange, a member of the Minnesota Public Utilities Commission, said it may be because they’re still busy analyzing, modeling and understanding implications of both approaches. States including Arkansas, Missouri and Iowa have recently hosted their first stakeholder meetings since the Aug. 3 rule (EnergyWire, Sept. 24). Michigan and some states plan to do their own modeling to complement work being done by regional transmission organizations.

"I don’t know if any state has done enough analysis to know that one approach is preferable over another," Lange said.

Becky Keogh, director of the Department of Environmental Quality for host state Arkansas, said the state is in "the think tank stage" of evaluating the Clean Power Plan. The state held its first meeting on the Clean Power Plan just last week (EnergyWire, Oct. 13).

Among the key questions it is trying to answer: What is the best approach? How might it affect reliability and environmental quality? Is the timeline sufficient to add new infrastructure, do environmental scoping and get regulatory approval? And what is the cost to consumers and the effect on the state’s economy?

States may also be hesitant to declare whether they’ll choose a rate- or mass-based approach until they know more about the potential for allowance trading. There’s broad agreement that a critical mass of trading partners is needed to keep costs down. States that adopt a different approach risk becoming islands and having higher compliance costs.

"Its hard to separate rate from mass discussions from discussions about regional trading," Bennett said.

Citing studies by grid operators MISO and Southwest Power Pool that show cost savings, Colette Honorable of the Federal Energy Regulatory Commission urged state planners, regulators, utilities, and environmental and consumer groups to evaluate multistate compliance options and keep a focus on what’s best for consumers.

Where implementation of the rule affects electricity users is "where the rubber meets the road," she said.

Meanwhile, she said FERC will be working with EPA to ensure that two mechanisms in the rule aimed at maintaining reliability work as intended.

"I believe belts and suspenders really don’t hurt," Honorable said.