February 2007

Push Me -- Pull You Policy Power Pet

by Roger Feldman  --   Bingham, Dana L.L.P.
(originally published by PMA OnLine Magazine: 2008/01/05)
 

Energy/environment policy often looks like a “Push Me Pull You” Dr. Seuss-type fictional pooch.  These days it appears that energy policy is the tail on the dog of global warming environmental policy.  The paradoxical result may be that in the power generation sector it will be “business as usual,” as the electric industry prepares to meet an urgent demand for supply increases in several disparate regions of the country.

“The most inconvenient truth about global warming is that we cannot stop it,” suggested a recent Newsweek columnist.  India and China are going to build 650 coal-fired plants by 2050 (by which time world energy production will have doubled) emissions of CO₂ from which will be five time those targeted by the Kyoto accords.  He might have added that the US power industry is poised to meet near term power shortages in several regions of the country by adding myriad new coal plants here as well.  Clean coal and hybrid cars promise to alter this picture - but they are not there yet.  Meanwhile power rates are rising as rate caps are withdrawn in deregulated states and the energy policy dog is beginning to emit a decidedly consumerist growl.

This is not to say that acquiescence to global Armageddon is a wise or a necessary policy.  The Pew Foundation recently recommended “coping with climate change” by “mitigation” and “adaptation” (e.g., anticipating the flooding of seaside resorts).  I would suggest that the same approach - done with overriding concern for energy security policy - is what should be hoped for in the national energy policy.  What we have today is a hodge-podge of regional product preferences, arm waving about techno-fixes and a relatively very small penetration in the power marketplace by the technical fixes which do presently exist.  And what we have is a lack of any working policy to mesh available renewables and conservation strategies.

One very important reason for this dilemma is that the ultimate delivery system for our electric energy is our regulated utilities.  They understandably have to keep at least one eye cocked for policies that will increase their costs or leave them lagging behind the market demand curve.  They are, after all, publicly-traded companies.

Utility policy makers may still be getting over the battle fatigue resulting from righteous efforts to make pure theoretical economics drive optimal pragmatic results in the real world.  The result of this “deregulation” has been to leave us with rising retail prices as price caps come off, subtle private power marketing strategies which take advantage of the price established by the highest marginal unit, and increased consolidation and/or continue market dominance by a handful of companies.  Such single firm good business may not (in the absence of significant regulatory intervention) either produce an improved fleet of less carbon-stained generators or an innovative surge of green technology (or even energy efficiency improvements).

It certain has produced rate-shocked and angry customers in many parts of the country, who want to hear about price, not carbon rollbacks.

There are now two new basic utility regulatory/strategies to at least mitigate the global warming future while still meeting supply requirements:  one conservation/power reduction oriented, and the other green power/production oriented.  They are being presented in similar regulatory forums.  In the absence of some conscious effort to intermesh them, they can conflict.  The following scenario could, without too much imagination, result: utility plant choice swinging to fossil fired behemoths, merchant green power suppliers being marginalized or transformed into minor satellites of utilities, and the movement to creatively abate climate change devolving into an expensive but delusionary PR campaign (with lots of green, sunshine, happy children, and blue skies).  It is important that energy efficiency and renewables policy be reconciled.

The first new regulatory trend proceeds from an apparently valid principle: elimination of the need for new power plants reduces new pollution and (to a degree) insecure energy supply.  To do this so far, principally individual states have begun summoning energy efficiency standards into the breach - particularly where no retail competition exists.  But this in turn triggers the age-old problem -- utilities are paid to produce power and realize on asset additions.  Unprofitable utilities drag down our economy as well as themselves.  Two new responses to this problem that have been injected into the argument are (i) predetermining utility profits each year, thereby separating their earnings from the volume of electricity they deliver (i.e., “decoupling,” already used for several gas utilities nationwide) and (ii) possibly, but not necessarily, linked to also rewarding utilities for meeting efficiency standards which are ratcheted up.

There is a logic in this, particularly from the point of view of energy efficiency investments in items such as transmission upgrade.  But depending on how it is implemented, it could have a variety of less desirable impacts on the operation of the resource performance standards which have been of value to green power merchant facilities.  If there is less power to be bought and sold by utilities, then there is less need to buy green power from third party merchants.  And if assured profits have been set at a high enough level, such green power as needs to be produced can be produced with “profit-insulated” internal capital investments.  The old fossil plants can continue to roam the plains.  The positive impact of evolving new technology competition is retarded for another energy generation.

But the other countervailing new regulatory trend can also head in suboptimal directions.  It is, taken to the extreme, which certain European countries have followed, to require payment by utilities of “feed-in-tariffs” which require utilities to purchase “clean energies” at a premium set by the government at a price passed on to consumers (or, more modestly, at a price set a certain percentage above the market).  In some countries this is bolstered by R&D and subsidies to consumers to support specific technologies.  The combination of resource performance standards coupled with tax credits for green producers has some of the same benefits, and may perhaps provide a greater market incentive by reducing the profit insulation provided by assured markets to merchant producers.  Likely, it serves to lower the competition level with utilities which might otherwise exist.  But what these pro-production policies do not by themselves do is mitigate the gobbling growth of power use of a mature industrial society.

Utility policy is unavoidably linked to the looming climate change crisis through the need to reconcile these possibly contradictory incentives.  It would not be audacious to suggest that conservation and green energy could be linked by a single new Federal policy tying efficiency credits and renewable credits together, thereby assuring that potentially competitive merchant suppliers could be a leading supplier of both.  This has proven very difficult to do at the fragmented state level, where, in addition to everything else, environmental and energy representatives have arrived at a series of different, and generally not adequately satisfactory, responses to the issues of meeting new load in an environmentally responsive way.

Congress currently is being called on to consider two different types of mandatory portfolio standard tradable credits:  those for energy efficiency and those for renewable energy.  (They are Federal analogues of the “white tags” and “green tags” voluntary programs which have sprung up.)  Each has carbon reducing characteristics.  Perhaps this is an appropriate setting to begin explicitly considering how energy efficiency and renewable energy, provided in a competitive private capital driven marketplace, could be yoked together through rewards mechanisms, even encouraged to be part of life cycle resource planning by utilities and consumers alike.  This would not be easy;  but it is preferable to superficially linking programs which can be complementary or antithetical depending on how they are incented, and effectively leaving the field to traditional technologies and players.  Utility regulatory policy is a specific context in which, if the twin environmental goals of mitigation and adaptation can be reconciled, the minimally productive push me - pull you policies of the present might be supervened by a push here and pull there policy guidedog.

ROGER FELDMAN, Co-Chair of Andrews Kurth LLP Climate Change and Carbon Markets Group has practiced law related to the finance of environmental and energy projects and companies for 40 years.  In particular, he has analyzed and executed a wide variety and substantial value of project financings.  He chairs the American Bar Association’s Committee on Carbon Trading and Finance, serves on the Board of the American Council for Renewable Energy, and has been a senior official in the Federal Energy Administration.  He is a graduate of Brown University, Yale Law School and Harvard Business School.