Regulated utilities, merchant generators battle over allowances

Two old foes -- regulated electric utilities and merchant generators -- are at odds again, this time over claims to valuable carbon emission allowances in the House climate bill.

The measure, authored by Democrats Henry Waxman of California and Ed Markey of Massachusetts, provides 35 percent of the free allowances or carbon-emission permits created in the cap-and-trade program to the electric power industry. Of that, 30 percent goes to traditional regulated utilities that deliver electricity to retail customers. It gives another 5 percent to independent merchant energy generators that sell power in competitive wholesale power markets, primarily in the Northeast, Great Lakes and California regions, and Texas.

That 30-5 split was the "biggest news" in last week's revised version of the Waxman-Markey bill, said Christine Tezak, an energy analyst with Robert W. Baird & Co., in a report this week. Merchant generation "was a subsector that looked at risk of being left in the cold altogether when it came to free allocations."

The National Association of Regulatory Utility Commissioners (NARUC), which represents the regulated part of the electricity sector, is campaigning to knock out the merchants' 5 percent share, saying it would create an undeserved windfall and do nothing to advance the climate bill's goals.

The 5 percent share currently outlined in the Waxman-Markey bill could be worth $2.7 billion to $5.5 billion a year at the start of the cap-and-trade program in 2012, said economist Andy Keeler, a professor at Ohio State University. The difference depends on how high the price on carbon emissions goes in the program's first years.


The Edison Electric Institute, the industry's principal lobbying arm, and the Electric Power Supply Association (EPSA), which lobbies for the merchant generators, are fighting for the 5 percent share. It is a critical sweetener in the bill meant to win support from House members from Texas and the Midwest with merchant coal-fired power plants -- votes that appear critical to the bill's success, according to both sides in the quarrel.

That has not stopped NARUC from opposing the provision.

"Naturally, everybody would like to get a piece of the pie," said Richard Morgan, a member of the District of Columbia Public Service Commission and a NARUC committee chairman. Channeling the allowances through local distribution companies that are subject to utility commission oversight guarantees that the money will go to consumers or be invested in energy efficiency programs or new technology, he said.

"We see this [the 5 percent allotment] as a windfall -- golden parachutes for dirty coal-fired plants," Morgan said. If the provisions aren't changed, he said, older merchant coal plants would get the valuable allowances whether or not they produced electricity. "They would have no obligation to keep running," he said.

John Shelk, president of EPSA, said it is a question of basic fairness. Merchant generators have 40 percent of the nation's generating capacity and must sell their power into competitive electricity markets -- they cannot count on utility commissions to pass their costs on to retail customers.

"These very same merchant companies with coal plants are doing wind and solar," Shelk said. "They won't just put this in the bank. If you precipitously cut off these companies, you cut the cash flow that helps them invest in other things."

"This idea of making coal generators whole -- where does that get into the debate?" Keeler asked. "Will coal generation become less profitable with a cap on carbon? Yes, it will. And if not, we will not switch away from it."

If that switch does not occur, added Keeler, a NARUC adviser, "then the program isn't working."

The allocation formula does not make a difference in the achievement of climate goals, Morgan said. It is a question of who gets the money, and you cannot divorce that from political realities, he said.

"If the intent of this section is to provide benefits to consumers, then they didn't do it right," Morgan added.

"Nobody wants this to fail," Shelk said. The 5 percent allocation is important in regions where merchant generators provide the power and also where companies mine coal for those plants.

"The regional considerations cover both where the plants are located and where they purchase coal," Shelk said. "At this point, the odds of things changing in the committee are low."

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