'Fragile compromise' of power plant CEOs in doubt as Senate debate approaches

When House Democrats wrote their global warming bill this spring, they relied on a carefully crafted agreement reached by some of the country's biggest electric utility companies that appeared to bridge decades of dispute among users of coal, natural gas and nuclear power.

Surprising many longtime observers, liberal Reps. Henry Waxman (D-Calif.) and Ed Markey (D-Mass.) incorporated a proposal from the Edison Electric Institute that helped determine how to slice up emission allocations potentially worth billions of dollars between power companies with a wide variety of fuel mixes.

But headed into this fall's Senate debate, CEOs from some of those same power companies are fighting to keep their coalition together. They face blistering dissent from at least eight Midwestern electric utilities with dominant coal portfolios -- companies that say they never signed off on the original deal and are now worried that the climate bill includes an allocation formula that will be too expensive for their customers.

Last year, the coal companies formed the Midwest Climate Coalition, an ad hoc group with no dues or formal agenda. Organizers say their goal now is to influence the Senate, where the political dynamics give equal footing to smaller states where they are located, rather than the House, where states with larger populations such as California and New York are much more heavily represented.


"It can't be all pain and no gain for the Midwest," said Zach Hill, senior manager for federal affairs at Alliant Energy Corp., a Madison, Wis.-based company that serves about 1 million customers in Wisconsin, Iowa and southern Minnesota.

Added Tom Knapp, a Washington representative for NorthWestern Corp., a Sioux Falls, S.D.-based power company with 675,000 customers in Montana, South Dakota and Nebraska, "Frankly, I don't see how a formula that allows people to make money off of other people's customers would survive at the end of the day. And unfortunately, that's how this formula is working out."

Joining Alliant and NorthWestern Corp. in the Midwest Coal Coalition (MCC) are MidAmerican Energy Holdings Corp. -- a subsidiary of Warren Buffett's Berkshire Hathaway -- as well as Wisconsin Energy Corp., Black Hills Corp., Minnesota Power, Otter Tail Corp. and MDU Resources Group, according to Hill and other utility officials.

Combined, the companies challenging the EEI deal service only a fraction of the country's population. With a little more than 6.3 million customers, they represent about 6 percent of investor-owned utility customers and about 4 percent of the nation's electricity users.

By contrast, most of the 30 electric utility companies at the center of the EEI agreement have nearly as large a customer base as the entire Midwestern coalition. Exelon Corp., for example, has the most retail customers in the country at 5.4 million, with PG&E Corp., FPL Group and Southern Co. not far behind.

But the coalition's small percentage of total customers does not matter so much when it comes to the power of the politicians located in the dozen or so Midwestern states they service, including Finance Chairman Max Baucus (D-Mont.), Agriculture Chairman Tom Harkin (D-Iowa), Democratic Policy Committee Chairman Byron Dorgan of North Dakota and Sen. Ben Nelson (D-Neb.).

Those senators are already making a stand. Dorgan and Nelson have not been shy about calling for an outright alternative to cap-and-trade legislation that does not involve the trading of emission credits -- an idea that first originated from MidAmerican officials. Harkin last month blasted the House formula, and the EEI-approved deal that went into it (E&ENews PM, July 21).

Baucus has been coy about what he will do when he takes a swing at the allocation issue in September. "First of all, I represent Montana, so I've got to represent my state as well as I possibly can," he said yesterday. "Second, we're just in the stage of getting information. It's why we're having these hearings. All the questions."

At the same time, Baucus' first question during yesterday's Finance Committee hearing was on this very issue.

According to Geoff Simon, a spokesman for Bismarck, N.D.-based MDU Resources, Dorgan and Baucus are not being swept up in the "euphoria" of just passing a climate bill. "I think these senators are absolutely point on in both the impact and what it would do to their state economies," Simon said.

EEI leaders are also pushing back, saying that their agreement came through an unanimous vote of about 80 power company CEOs and their work represents a consensus across nearly all 50 states. And they insist that critics of the agreement are largely a band of renegade power companies, some of which operate World War II-era coal plants that release 30 to 40 percent more carbon dioxide than newer models.

"We worked hard to come up with this compromise," said Lew Hay, the CEO of FPL Group Inc., which has more than 4.5 million customers in Florida. "It's a fragile compromise. It's easy to sit back and say whatever people are saying."

Defenders of the House bill question whether the critics are simply out to kill the legislation, which would result in U.S. EPA taking the lead with its own suite of climate regulations under a 2007 Supreme Court opinion -- an almost certain losing scenario for all electric utilities.

And many of the companies that signed on to the EEI deal are also worried that the dissenters are just getting started. They caution that momentum on a climate bill would be undercut if more and more power plant owners start to speak up against the agreement that helped propel the House legislation, H.R. 2454.

"The fact EEI delivered a unified product, it's a huge accelerator to passage," said Jim Connaughton, an executive vice president of Baltimore-based Constellation Energy Inc. and the former lead White House environmental adviser to President George W. Bush. "If you undo that, what you're doing is willingly putting on the brake."

The toughest nut

EEI's January 2009 agreement was the byproduct of almost two years of closed-door negotiations launched after Democrats took control of the House and Senate and promised action on climate change. The electric utility CEOs said they were urged to come up with a consensus plan by Rep. John Dingell (D-Mich.), who at the time chaired the House Energy and Commerce Committee.

In their proposal, EEI requested Congress deliver 40 percent of the cap-and-trade system's emission credits for free. They picked 40 percent because that is the industry's contribution to the annual U.S. greenhouse gas inventory.

The power company trade association also tried to address concerns that their member companies were trying to make windfall profits by turning around and charging their customers for the allowance values they would receive for free, a problem encountered in the European Union's cap-and-trade program. Here, EEI suggested lawmakers direct the allowances to retail local distribution companies that deliver electricity to households across the country that are all regulated by state commissions, alleviating the windfall profits concern.

But the toughest nut to crack in the deal -- and the one currently threatening to unravel -- involved the formula for emissions credits. EEI split the difference between the coal, nuclear and natural gas companies. Under the EEI formula, the allowances were split 50-50 based on a company's historic emissions and retail sales.

Merchant coal generation would also get most of the remaining share of the allowances based on half of their emissions.

"We thought it was the most fair to the largest group of customers," said Bob Blue, head of government affairs for Dominion Resources Inc., a Richmond, Va.-based company that ran much of the underlying analysis that led to the EEI agreement.

For EEI, the deal was a watershed moment that brought together companies with a wide variety of fuel portfolios, from nuclear-dominant Exelon to Southern Co., which has significant coal and nuclear generating portfolio and four utilities that serve about 4.4 million retail customers across Alabama, Georgia, Florida and Mississippi.

House Democrats lined up behind the plan as well, starting with Rep. Rick Boucher (D-W.Va.), an influential moderate on the Energy and Commerce Committee. Then came Waxman and Markey.

EEI officials were close by as the bill worked its way through the House. Tom Kuhn, the group's executive director, stood in the doorway during the late night Energy and Commerce Committee markups in May. And EEI's senior vice president, Brian Wolff, a former top political adviser to House Speaker Nancy Pelosi (D-Calif.), worked the Capitol corridors, lobbying reluctant Democrats in the hours before the House adopted the bill on a narrow, 219-212 vote.

Tony Earley, the CEO of Detroit-based DTE Energy Co., as well as the current chairman of EEI, said that the utilities found success in the House debate because of their agreement on the allocation formula. It also helped that they were on record supporting an overall goal to curb greenhouse gas emissions 80 percent by 2050. "That position has been very helpful in getting people's attention," he said.

Sen. Tom Carper (D-Del.), a member of the Environment and Public Works and Finance committees, said he plans to fight to keep the EEI allocation formula in place in the Senate.

"I thought the utility industry did a great service by coming up with a compromise that all of them could live with," he said. "Most legislators are lay people. We can't be experts. We need for the industry to come up to us and say we think this is a fair compromise. They've done that. I think we should embrace it."

Take it or leave it?

But the formula doesn't do the trick for every utility, especially those most reliant on coal.

Many of the Midwestern utilities praise EEI for steering the debate away from President Obama's call earlier this year to auction off nearly all of the emission allowances. Still, one by one, they have been speaking up about the fact that, by their calculations, their customers are subsidizing other companies' customers' electricity bills.

For starters, MidAmerican claims the bill could raise electric rates for their customers as much as 25 percent if the House formula were to become law.

Minnesota Power, a Duluth-based company with about 150,000 retail customers in the state's northeastern corner, said the House bill would leave it short by about 4 million allowances. Those allowances would cost about $60 million per year, about the same as the company's annual operating revenue, according to Bill Libro, the company's representative in Washington.

"It's a pretty big number," Libro said.

As for Black Hills Power Co., which has 68,000 customers in western South Dakota, eastern Wyoming and Montana, it can expect price increases of 43 percent based on its own estimates of the House bill, said Linn Evans, the company's president and chief operating officer. And another subsidiary, Cheyenne Light, Fuel & Power Co., would see rates go up 37 percent.

"A lot of large EEI companies with interest in nuclear power... are willing to throw the rest of us overboard," said Simon of MDU Resources. The holding company -- which joined the Fortune 500 list this year -- owns one electric utility that serves almost 120,000 electric customers mainly in North Dakota, with some spill over into Montana, South Dakota and Wyoming. It also owns significant natural gas utilities in the area, and oil and natural gas pipeline and utility construction services.

According to Simon, many utilities who do not need the emission allowances are "rubbing their hands together" at what they might gain from the House bill's formula. EEI's Kuhn counters that the House legislation includes a "windfall" safeguard provision that won't allow any company to get more allowances than they need. But Simon and other critics say the language is too vague and does not specify the criteria EPA must use to bird-dog the cap-and-trade program.

"Some companies are just looking at this as 'Let's go, This is the best deal we can get.' And others, our viewpoint is, if the best deal doesn't work, what is the point of the best deal?" Simon said.

Several members of the Midwest Climate Coalition contend that they never signed on to the EEI agreement in the first place, either because of changes in leadership or insufficient details about the negotiations.

Libro said Minnesota Power did not tune in until after the House legislation was moving, in part because he was skeptical industry and the Democratic committee leaders would reach an agreement.

"Quite frankly, EEI doesn't have a long track record of working with either of the two members," he said.

As for MidAmerican, its executives were not even members of EEI during the negotiations. The company had stopped paying dues in early 2007 to protest the public statements of two EEI leaders at the time -- PNM Resources CEO Jeff Sterba and Duke Energy Corp. CEO Jim Rogers. Both also had become top spokespersons in the U.S. Climate Action Partnership, a coalition of environmental groups and businesses with its own stance on climate legislation.

"This was a kick in the face," a Midwestern official said, explaining that the two CEOs had not given EEI members a heads up about their separate work, and they also left the impression they would side with U.S. CAP over EEI.

MidAmerican did rejoin EEI again this May, but it was well after the allocation negotiations were finished. The company's leaders have since spoken out against the House bill's allocation formula, including at an Energy and Commerce subcommittee hearing in June and again during an EEI board meeting last month in San Francisco.

Toeing the line

The Midwest Climate Coalition also counts some members who are not so eager to buck the EEI allocation agreement.

Officials from Oklahoma Gas and Electric Energy Corp. say they are trying to educate senators with coal-heavy generation portfolios about what the House bill means for their customers, according to spokesman George Baker. The company's subsidiary, OGE Electric Services, serves more than 765,000 retail customers in Oklahoma and western Arkansas.

"We are alerting our delegation, as other companies in the Midwest are, as to the actual impact of the Waxman-Markey bill to the customers," Baker said. "The companies on the coast seem to be in a great position. Companies in the Midwest seem to be in a very different position and their customers are expecting to bear the brunt of the Waxman-Markey bill."

EEI deserves credit for raising several other critical issues to the Senate about changes it wants to the House bill, Baker said, including a "price collar" -- to make sure allowance prices do not go above a certain high or low. EEI also is pushing to water down the cap-and-trade program's 2020 emission targets, which currently sit at 17 percent below 2005 levels.

"The bottom line is the Midwest utilities need more allowances, and the other adjustments are important as well," he said, adding that Oklahoma Gas and Electric Co. is not trying to upset the EEI agreement.

Similarly, Allegheny Energy Inc., Ameren Corp., Great Plains Energy Inc., DTE and NiSource are all Midwest Climate Coalition members who still officially support the EEI language on allocations.

Becky Sczudlo, vice president of federal government affairs at Merrillville, Ind.-based NiSource, agreed with her colleagues that the House legislation unfairly penalizes coal. But she said her focus is on changing the Senate bill to deal with volatile compliance costs. "The bottom line is we need as many cost containment mechanisms as possible," she said.

CMS Energy Corp., a Jackson, Mich.-based utility, declined to comment on the House legislation's allocation formula but acknowledged playing a role in the Midwest Climate Coalition.

Duke Energy officials participated in the Midwest Climate Coalition earlier this year, but they have since distanced themselves from the group. Still, the company's stance on the House legislation and the EEI allocations remains subject to interpretation.

Rogers, the company's CEO, appeared at a news conference in the Capitol last month with Sens. John Kerry (D-Mass.) and Barbara Boxer (D-Calif.) to urge Senate passage of a climate bill. But Rogers has also suggested the House bill's allocation formula won't have complete traction in the Senate because of the roughly 25 coal states that will want to change the bill to their liking.

"We want to get that allocation right," said Duke spokesman Tom Williams. "And the House largely did that. Could it be improved, to further moderate, to really add to the transition period and make it less hard for consumers? Yes it could."

Williams insisted Duke was still on board with the EEI agreement. "We're not saying we're leaving EEI by any means," he said.

AEP, another big coal company, has not joined the Midwest Climate Coalition. Representatives from the Columbus, Ohio-based company, the third largest by way of retail customers at 5.2 million, did not respond to requests for comment on its views of the House climate bill.

'It's aging better than fish'

There are bets on both sides whether EEI can hold on to its coalition.

"It's aging better than fish," said Jason Grumet, a former energy adviser to President Obama who serves as executive director of the National Commission on Energy Policy. "These are like any compromise. Over time, people recognize that there are ways to perfect the compromise to their own advantage."

Grumet predicted "the basic architecture" in the House bill would likely remain in the Senate plan, including the 50-50 formula. "That core idea feels to me to be pretty robust," he said.

Others disagree.

"I'd expect it to fall apart at some point during this process," said Andrew Wheeler, the former Republican staff director of the Environment and Public Works Committee.

Wheeler, who now works now for B&D Consulting, expects a free-for-all among the power companies as the issue works its way through the Senate.

"What held all of them together on the House side is the fact they had this Senate debate," he said. "But when it comes to at the end of the day, credits are credits, and allowances are allowances, and people are going to be fighting tooth and nail to be getting their credits."

Sen. Kit Bond (R-Mo.) criticized the power companies for even trying to negotiate with congressional Democrats. Either way, he said, the electric utilities lose. "That's bargaining with somebody on how they're going to hang you," Bond said. "They'll hang you with minimal pain, or they'll torture you to death."

Several utility officials working to keep the EEI agreement intact maintain that the best way to deal with the Midwestern coal companies' concerns is to get more allowances. That is why EEI is pushing the Senate to increase the pot of credits from 35 percent to the group's original 40 percent level.

"The most important thing utilities can do is to get full allocation of the allowances," DTE's Earley said. "If we get 40 percent of the allowances, it will be far more beneficial than any change of the 50-50 formula."

CEOs linked to the EEI deal have been making their case with regular visits to the Capitol. Kuhn said he brought in three groups of corporate leaders last month alone, meeting with about a third of the Senate.

But the unhappy Midwestern utilities are lobbying too -- and they think they have an advantage.

"Look, they cut the deals, they did what they had to do to get a bill through and lo and behold they passed it," said Alliant's Hill. "The dynamics are different in the Senate. In the House, we knew it'd be a closed rule. We knew all the deals would be made behind the scenes. But each senator is going to ask for a ransom compared to what the House members got. They're also designed to take a more careful close look at it. And they can say there's a lot of unfairness to the bill."

MDU's Simon said he did not have a problem if the Senate does not act on a climate bill this year.

"I guess you can look at it and say a 'no' vote is a good vote," he said. "I think if a bill gets defeated, that doesn't mean nothing will happen. I think those senators are willing to address something that is a more reasonable approach."

MidAmerican's campaign is taking place both in the Midwest and in Washington.

In Iowa, the company has been running print and broadcast ads critical of three House Democrats who voted for the climate bill: Reps. Leonard Boswell, Bruce Braley and Dave Loebsack. It is especially bitter for Boswell, who had prepared an amendment before the floor debate to change the formula to the company's liking. But Democratic leaders did not allow it.

The company has also taken its case to the White House, with a meeting in late July that included Obama energy adviser Carol Browner. MidAmerican's Jonathan Weisgall, vice president of legislative and regulatory affairs, insists that the company is not out to kill the climate bill.

"Our near-term goal is to help the Senate come up with a product that either is an alternative to the Waxman-Markey approach or is an improvement of the construction of Waxman-Markey," Weisgall said. "We're dealing with inequities facing coal generation. I think to say if you touch the formula, the whole thing comes apart and therefore your real agenda is to kill the bill is simplistic and it's simply not true. It reminds me of when people said if you speak out against the war you're not a patriot."

For their part, environmental groups are largely staying out of the allocation fight because no matter which way the allowances are sliced up, the electric utility companies still must reduce their emissions. "That's the job of the cap," said Nathaniel Keohane, director of environmental policy and analysis at the Environmental Defense Fund.

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