Duke Energy's maneuvering raises questions about carbon allocations

Duke Energy Ohio is asking federal regulators to approve the transfer of its Ohio power plants to companies owned by North Carolina-based Duke Energy Corp. whose rates are set in a competitive market instead of by state regulators.

Duke filed its request with the Federal Energy Regulatory Commission last week after the Ohio Senate approved a broad energy bill that prohibits such ownership transfers without the approval of the Public Utilities Commission of Ohio. Gov. Ted Strickland (D) yesterday signed the bill that also requires that 25 percent of electricity be drawn from "advanced technology" sources by 2025 and promotes efficiency.

While Duke's move has implications for Ohio electricity rates, transferring ownership of its regulated subsidiaries to a competitive market could help Duke financially if the leading U.S. Senate climate bill becomes law.

The bill written by Sens. Joe Lieberman (I-Conn.) and John Warner (R-Va.) initially gives fossil-fuel power plants 19 percent of free allocations for greenhouse gas emissions to help cushion the expense of curbing those emissions when a carbon cap is set. As the nation's third-largest carbon emitter, Duke stands to gain allocations worth hundreds of millions of dollars under that scenario.


State regulators in traditionally regulated markets would not allow utilities that get free emission allocations to pass on pollution-reduction costs to customers. But utilities in competitive wholesale markets could conceivably take the free allocations and still pass on to their customers the full cost of cutting emissions -- a problem demonstrated in the European Union's cap-and-trade system. In Germany, for example, electricity prices jumped 25 percent while utilities earned extraordinary profits during the first trading period.

Duke Chief Executive and President Jim Rogers is a staunch advocate of legislation to reduce carbon emissions through a cap-and-trade mechanism. But he has said it will only work if carbon emissions allowances are provided at no cost based on a company's CO2 emission history. Such a scheme, he said, would protect consumers from skyrocketing electricity prices during the "transition" to low-carbon technology.

Protecting the bottom line?

But Frank O'Donnell, head of Clean Air Watch, said Duke Energy Ohio's maneuvers suggest that what the company is "really concerned about is the company's bottom line." The advocacy group recently published a white paper criticizing Rogers for advocating a climate policy that would help Duke Energy and not protect consumers.

"If Rogers was genuine in his desire to protect electricity consumers -- and not just those in his service territory -- he would look to the approach proposed by Senators Lieberman and Warner in the Climate Security Act whereby a portion of allowances are specifically directed to consumer benefit and end-use energy efficiency," the paper says.

Duke announced this morning that its first quarter profits reached $465 million, or 37 cents per share, a 30 percent jump over the same period last year.

But Rogers has vowed "in blood" that all savings from any free emission allocations would be passed on to consumers. He said he opposes the Lieberman-Warner bill because of the allocation system and what he sees as broken funding mechanisms for clean technology.

"It is not morally right ... to punish those carrying out the national policy of decades ago" when coal was pushed as the alternative to oil for electricity generation, Rogers told an audience at the Ceres Conference in Boston on Tuesday.

Said Duke spokesman Tom Williams in an e-mail, "The filing and the timing of any consideration of climate legislation are totally unrelated."

Steve Brash, a spokesman for Duke Energy Ohio, said the company had proposed transferring its assets as early as 2000, when Ohio considered becoming a competitive wholesale market. The move would give the company more access to capital markets and "permit the financial community to recognize the full value of the unregulated portfolio," he said.

"The timing was dictated by the need to provide time for the FERC to consider the filing," Brash said in an e-mail. "We waited until the Ohio legislation was approved to make sure there was nothing that would affect the filing."

Local distribution companies

The National Association of Regulatory Utility Commissioners has a solution to the uncertainty and imbalance between traditional and competitive markets. NARUC says free carbon emission allowances should be given to local distribution companies and would therefore be regulated by public utility commissioners.

The association wrote a letter last week to the Senate Environment and Public Works Committee urging changes in the distributions proposed by the Lieberman-Warner bill.

"The legislation's method of allocating allowances to the electricity sector will benefit certain companies at the expense of end-use electricity customers," the group wrote. "The allocation scheme in the legislation will provide an opportunity for generation owners in restructured markets to receive a substantial economic advantage relative to generators in traditionally regulated markets."

Click here to view the white paper.

Click here to view the letter.

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