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UCS Analysis and Recommendations for Electric Utility Allowance Allocations Under Climate Legislation

Background

The American Clean Energy and Security (ACES, H.R. 2454) Act passed the U.S. House of representatives in June 2009, and the U.S. Senate is currently considering the Clean Energy Jobs and American Power Act (CEJAPA, S.1733). The bills are similar but not identical; both would combine a cap on global warming pollution and a suite of energy and transportation policies to create new clean energy jobs and reduce global warming emissions. The bills would require that capped sources obtain emissions allowances to cover the global warming pollution they produce, and they would have the flexibility to choose the best mix of reducing emissions and/or buying allowances for their situation. In the early years, both ACES and CEJAPA would give most capped sources some free emissions allowances to help minimize transitional costs.

For example, both bills would give allowances to regulated electric utilities, also known as Local Distribution Companies (LDCs). Both bills would require LDCs to use the value of the free emissions allowances to protect customers from potential increases in energy costs. To meet that requirement, LDCs would likely offer rebates to their customers, either on a per household or per capita basis, or make investments in energy efficiency.

Under both bills, LDCs would receive half of their emissions allowances based on global warming emissions and the other half based on their electricity sales. On November 12, 14 senators wrote to Sens. Harry Reid (D-Nev.), Barbara Boxer (D-Calif.), Max Baucus (D-Mont.) and John Kerry (D-Mass.) asking that they change the allocations formula and base allowances entirely on emissions. The 14 senators argued that the 50 /50 formula would not be equitable, because “utilities that are more coal dependent will need to purchase even more allowances than they would have if all allowances were allocated based on emissions, and those costs will be passed on to customers.” On the other hand, they write, utilities with lower emissions would receive enough allowances to cover compliance costs, and their customers would not experience cost increases.

This past summer, Sen. Russ Feingold (D-Wis.), one of the 14 senators who raised the issue with Sen. Reid and others, requested that the Environmental Protection Agency compare LDC allowance distribution under a 100 percent emissions-based formula and the 50/50 formula. The EPA analysis of the 50/50 formula found that California LDCs would receive more allowances than needed to cover their emissions, and LDCs in the Northwest and Northeast would receive roughly the same number of allowances as their emissions. Meanwhile, many LDCs in the Midwest, South, Mid-Atlantic and some intermountain western states would receive fewer allowances than their emissions.

Analysis

  • The EPA analysis appears to over-state the disparity between coal-heavy LDCs and cleaner LDCs under the 50/50 allocation formula. Both the House and Senate bills include language explicitly requiring EPA to ensure in its rulemaking that no LDC would receive more allowances than needed to cover any increased costs. However, EPA’s analysis ignored this restriction and assumes some utilities would receive a windfall profit. This faulty assumption increases EPA’s estimated allowance gap between cleaner vs. dirtier LDCs and states. (1)  
  • EPA’s analysis showed that coal-dependent Midwestern LDCs would receive only a modest increase in allowances and revenues under a 100 percent emissions-based formula. For instance, Wisconsin LDCs would receive roughly $13 per person per year more in 2012 if 100 percent of the allowances were based on emissions.  In addition, some other high-emissions LDCs would benefit only minimally (Fla., Texas) or lose allowances (Penn., Ark., N.C., Va.) under a formula based entirely on emissions, according to the EPA analysis.  Because EPA’s analysis exaggerates the gap between higher- and lower-emitting LDCs under the 50/50 allocation formula, the actual increase in allowances and revenues from a 100 percent emissions formula in Wisconsin and other coal-heavy states would be less than what EPA found.
  • UCS’s analysis demonstrates that, even under a 50/50 allocations formula, average residential electricity prices in coal-dependent states would remain significantly lower than states with cleaner electricity portfolios and well below the national average. (2)
  • The best way to prevent electricity cost increases is to invest in energy efficiency.  Both bills require natural gas and heating oil utilities to invest a percentage of the revenue from their free allowances in energy efficiency.  But the bills do not require LDCs to make the same efficiency investments.  Moreover, both bills have weak energy demand reduction requirements for utilities.  Energy efficiency investments typically yield $3 in consumer savings for every $1 invested. For instance, the American Council for an Energy-Efficient Economy (ACEEE) projected that the stronger energy efficiency resource standard in the original ACES bill would save consumers a net $168.6 billion in 2020, create 222,000 net jobs, and cut global warming emissions equivalent to 390 power plants or 48 million automobiles. Their analysis did not include other energy efficiency provisions in the ACES bill that would create additional benefits.

Recommendations

  • UCS believes the 50/50 allocations formula strikes a fair balance between LDCs with high emissions and those that made early investments in clean energy and should not be penalized for doing so. Regardless of which formula the Senate chooses, UCS recommends that:
    • The Senate bill require LDCs to invest a significant percentage of their free allowance revenues in energy efficiency (as is the case with natural gas and heating oil allocations in ACES and CEJAPA) in order to reduce emissions and minimize costs. The energy efficiency requirement should increase as the formula’s dependence on emissions increases.
    • The Senate bill should strengthen and clarify the EPA’s authority to adjust the allocation formula to prohibit the distribution of allowances in excess of an LDCs’ increased costs under the program.  And, if the allocations formula is changed to rely more on emissions, EPA should also be given authority to ensure that cleaner utilities are not under-compensated for their costs.

(1) We have not at this time estimated how significant EPA’s flaws are. 

(2) Available upon request. Derived from Change in Monthly Average Residential Electricity Bills in 2012 under the Waxman-Markey Bill. M.J. Bradley and Associates. July 2009.  

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