How are legal challenges to the Clean Power Plan affecting regulators' ability to effectively plan for the future under the rule? During today’s OnPoint, Travis Kavulla, president of the National Association of Regulatory Utility Commissioners and a member of the Montana Public Service Commission, discusses how his state is working toward compliance, while concurrently legally challenging the rule. He also explains why the Clean Energy Incentive Program is not being prominently considered in compliance discussions in his state.
Monica Trauzzi: Hello, and welcome to OnPoint. I'm Monica Trauzzi. Joining me today is Travis Kavulla, president of the National Association of Regulatory Utility Commissioners and a member of the Montana Public Service Commission. President Kavulla, thanks for joining me.
Travis Kavulla: Thanks, Monica. Glad to be here.
Monica Trauzzi: So as president of NARUC, you are representing a range of incredibly diverse opinions on EPA's Clean Power Plan. Is your sense that all states are having at least some degree of conversation about compliance, regardless of whether they have publicly said so or are legally challenging the rule?
Travis Kavulla: I think so. I mean, you had a political dynamic before where there was a faction of states that simply said, we're challenging and that's our only plan. But those statements were coming out before people saw the federal implementation plan, and if approved in its draft form, that plan could well simply cede the states' ability to make some of the most politically complicated decisions, like the allocation of allowances for a mass-based trading regime, to a decision of a federal template. And that's not going to be acceptable to really any state, I feel. So the only time I would see a state not engaging is in perhaps complicated political situations that have to do with a state's internal politics, probably less so with the scope of national politics.
Monica Trauzzi: Do you have a specific example of a state where -- that would fall in that category?
Travis Kavulla: Well, I can certainly think -- I don't have a specific example, but just -- I can theorize about states with divided governments, certain party controls the legislature, the other party the governor. There's a lot of hay that can be made off of even a minimalist approach to complying with this federal regulation. You know, and coming from Montana, we have experience with being FIPed, as we call it, and it's not a pleasant one. I mean, it has certainly imposed more costs than would have otherwise occurred under a state plan, and so I think it really is incumbent on the members of NARUC and the air regulators and the governors of every state to come up with something.
Monica Trauzzi: Right. How big a part of the conversation is trading playing among regulators?
Travis Kavulla: It's playing a big part. You know, at least -- you know, I tend to be -- consider these questions under a lens of economics. And to me, a classic way to comply with this type of regulation would be to take a state's total carbon emissions budget where it is now, where it has to be by 2022 and then stepping to 2030, and then assign allowances based on those compliance targets to the emitting generators. And then allow them to figure out a trading regime across the nation in a way that would value allowances and value plants based on where power is most expensive, where plants are important in terms of reliability considerations, where it's hard to build an alternative natural gas or renewable plant, and allow essentially the market itself to endogenously find a price for carbon. I think that's the model, but you can tell by EPA's own pronouncements, even though they theoretically endorse this approach, you can tell by their own pronouncements about how this is an investment regime, a jobs plan, if you will, that economic efficiency is going to have to be balanced with political palatability in a state coming up with a plan. And so I think the real question is, how much of a crazy quilt are these state plans going to be? Are they actually going to be able to talk to one another? Are they going to be tradable with one another? That's an unanswered question, and it's going to be answered in 40-something different ways.
Monica Trauzzi: And do you think there's enough time for all of that to sort of come together and for there to be some level of cohesion among states?
Travis Kavulla: I hope so, but you know, EPA's made much over -- of extending its deadline and extending its compliance window, but I'm not sure. I mean, I assume the vast majority of states will make their submissions in 2018. That gives them four years to comply, effectively, and I just don't know. There are other considerations, too. I mean, you have people who have -- if they adopted a mass-based approach, a surplus of allowances, but certain political influences within those states are calling on those states not to monetize those allowances for sale to other states on the basis that that would just be keeping open coal plants in those states. They're instead calling for them to be retired rather than monetized. If a lot of that happens, I think we'd be in real trouble with the liquidity and workability of such a market.
Monica Trauzzi: Montana has filed suit against EPA as part of a coalition of states challenging the rule, and your state is one of those states that's taking sort of that two-pronged approach of legally challenging the rule and then also working towards creating a compliance mechanism. Your governor has created an advisory council to draft a state plan. How do the legal challenges impact your abilities as a regulator to effectively plan for the future under the plan?
Travis Kavulla: It injects uncertainty into everything. You know, why would you invest a dollar complying with the rule that then gets invalidated? But that's nothing new. I mean, we've been answering questions that are similar to that throughout the last decade and a half. I mean, with respect to MATS, we had to -- Mercury and Air Toxics Standard -- we had to ask, well, if you invest a dollar complying with MATS for this plant, what happens when the Clean Power Plan or the cooling water intake rule requires you to spend the second or third dollar and makes the initial investment seem like a stupid idea? So, you know, this is a time of uncertainty, and much of that uncertainty is being injected into the regime of utility regulation by these environmental considerations. You know, I will say it -- uncertainty is relative, and before the Clean Power Plan came out, there was no price at all on carbon except in a very few number of jurisdictions that had adopted their own regulations. Now there's not a price on carbon, but at least you know what kind of target you're hitting at. So there might be less uncertainty, and I'm not characterizing it as good or bad; I'm just saying there might actually be a little less uncertainty now than there had been before, but, you know, the Clean Power Plan has so many moving parts and variables, it's not a regime of cap and trade or carbon taxation at a national level that really offers any kind of blueprint to anyone who estimate capital investments. Not at this point, anyway.
Monica Trauzzi: What steps is your PSC taking right now in terms of developing a strategy for managing the required emissions reductions with your heavy reliance on coal?
Travis Kavulla: You know, the Montana PSC staff has put out nearly 10 white papers that just explain concepts for a reasonably intelligent but not expert audience of policymakers, be they legislators, members of the public in Montana, commissioners. And, you know, they've tried to take building blocks of what Montana might be able to do and get us to a place just conceptually where we meet our target. You know, one of the things about Montana is that, you know, most of our coal-generated electricity is not consumed by utilities in Montana. It's exported from the state. And so you have the strange situation where Montana's governor and environmental regulator are responsible for making decisions about the property of utilities that serve customers not in Montana. It's a complicated situation of political economy. There are big differences in the political landscape between Washington state, Oregon state and Montana in terms of that importing-exporting relationship. It's really unclear how that will play out. You know, I would expect there to be a dialogue of the utility co-owners of some of those big coal plants in the West that are located in Montana, Wyoming, Utah.
Monica Trauzzi: Are you confident that the lights will stay on under this plan in your state?
Travis Kavulla: You know, our state has enough hydroelectric power. It has enough capacity for natural gas. It has enough renewable potential that it's not a question, I don't think, immediately of reliability so long as you don't put a price tag on reliability. It could be very expensive -- very expensive to comply with this rule. Do I think the lights will go out? I don't think that will happen. I should hope not.
Monica Trauzzi: How valuable of a resource is the Clean Energy Incentive Program to your state as you work towards grafting a compliance mechanism?
Travis Kavulla: You know, it's candidly, I think, only a detail in the scope of the plan so far. It's not -- it's something that got a bit of attention when the rule first came out. It's not something that I hear being prominently discussed within our state plan crafting at the moment. To the degree to which it's taken advantage of, it might almost be accidentally so, simply because there are renewable developments in energy efficiency developments in the pipeline for various states during the period that they would qualify for the incentive program. Will it actually drive investments prior to the formal compliance period? I think, candidly, it's a bit too soon to tell. I would assume that the bulk of that work will have to come from utilities' sort of integrated resource plans that try to identify when exactly resources are needed and whether -- and a quantification of the economic advantage. It's hard to say, though, when you're talking about an incentive program that simply sort of churns out additional allowances or credits, what those will be worth if you don't know the underlying value of a credit that will be traded on the market. You know, the market's not operational. There aren't a lot of good models that suggest what an allowance might be sold for, so we just don't know yet.
Monica Trauzzi: Do you think it's in Montana's best interest to be part of a regional trading program like we were talking about earlier?
Travis Kavulla: I don't know, if Montana didn't -- was not able to buy allowances from other states, we would have to close essentially all or most of our coal. I mean, our coal-fired assets are concentrated in one large, roughly 2,100-megawatt facility, and given the fact that our reductions are the steepest on a percentage basis in the nation -- 47 percent -- you'd have to close down that entire plant. So, you know, I mean, I'm willing to say Montana's coal future depends on either this rule being vacated, or if it's not, the ability of Montana to buy allowances from others.
Monica Trauzzi: All right. We're going to end it right there on that note. Thank you so much for your time and for coming on the show.
Travis Kavulla: Thanks, Monica.
Monica Trauzzi: And thanks for watching. We'll see you back here tomorrow.
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