Distribution Utilities’ Important Role under the Clean Power Plan
Industry:

by Paul Augustine

The EPA’s Clean Power Plan (CPP) defers many implementation decisions to states; EPA sets overall limits for each state and allows them to figure out how best to meet those limits. Under CPP, states can use rate-based or mass-based standards and can regulate individual electric generating units (EGUs) directly or develop intrastate or interstate trading programs. EPA’s proposed plan and model trading rule guidance suggest that the Agency prefers to use market mechanisms to achieve the targeted emission reductions, drawing on EPA’s extensive experience with other trading programs (namely Acid Rain Program sulfur dioxide (SO2) trading, the Nitrogen Oxides (NOx) Budget Trading Program, the Clean Air Interstate Rule (CAIR), and the Cross-State Air Pollution Rule (CSAPR)). Under a rate-based trading system, EGUs could comply by making technical or operational improvements that result in emission-rate reductions or by purchasing Emission Rate Credits (ERCs). Under a mass-based system, EGUs would comply through purchasing emission allowances. While state plans would cover the owners of EGUs (primarily independent power producers and vertically integrated utilities) as the point of regulation, in states with restructured electricity markets, distribution utilities will be directly affected by the design of the state implementation plans and will play a key role in managing customer impact of the rules. 

At the surface, EGU owners bear the cost of compliance with the CPP, but they will pass those costs along to distribution utilities and, ultimately, to end-use customers. California’s greenhouse gas cap-and-trade program provides an example of how the mechanics actually work. In California, public utility commission-approved contracts allow EGU owners to pass along the cap-and-trade compliance costs to distribution utilities in long-term power purchase agreements. For power that is sold into the market, an additional cost of carbon has been embedded in the cost of the energy since the program went into effect on January 1, 2013. Distribution utilities, then, end up direct interfacing with consumers on the new carbon cost. So while distribution utilities may not be directly regulated under state implementation of the CPP, they could end up being very directly affected by the regulations—they will be the ones passing along costs to their customers and likely hear any resulting customer complaints. Under the Regional Greenhouse Gas Initiative (RGGI) CO2 trading program in New York and New England states, carbon costs are embedded in wholesale market prices such that any purchaser, be it a distribution utility or retail provider, pays the cost directly and passes it on to customers.

In order to mitigate impacts to customers, states can use market mechanisms to their advantage. Specifically, states can distribute allowances or ERCs in a way that reduces the programs’ impacts on customers. There are a few paths to accomplish this. First, the states could, themselves, auction all of the allowances/ ERCs and use revenue for public benefit, with a focus on economic, political, and/or social goals. Second, the states could allocate allowances/ ERCs to regulated distribution utilities, which would sell them in the market to generators, and use the revenue to counteract rate impacts of the carbon cost. The former is the approach taken by RGGI states. The latter is the approach taken by California under its cap-and-trade program. The approaches have been effective under both RGGI and the California cap-and-trade program, resulting in modest impact to consumers. They also avoid an issue that put a black eye on European Union’s Emissions Trading Scheme very early into that program’s implementation—windfall profits to power plant owners—and they should, therefore, be considered by states as they develop their CPP compliance plans over the coming months.

While the legal battle over the Clean Power Plan draws on, many states continue to work on CPP implementation plans. State environmental agencies along with utility commissions must work together, and distribution utilities should take a proactive approach to get a seat at the table to discuss customer protection under a state’s CPP compliance program. These stakeholders will serve the most critical roles in managing CPP-related costs for customers. 




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