Our annual survey of rates of return on common equity authorized by state public utility commissions in recent rate cases for electric and gas retail distribution utilities.
The AGs' Global Warming Suits:
A recent lawsuit filed by eight state attorneys general will take the industry to the place where bad policy meets with bad economics.
We all want cleaner air and less pollution. Growing up in an era of acid rain, smog alerts, and, more recently, the threat of global warming and environmental apocalypse, the urge to "do something" today is natural. And because regulations to address air pollution under the Clean Air Act have evolved through a slow, complex, and convoluted process for more than 50 years, that urge has naturally turned to litigation. But regulation by litigation is a terribly expensive and ineffective policy tool. For electric utilities, which remain at the center of many environmental policy battles, litigation is a "lose-lose" proposition that can mean higher costs and less financial security far into the future.
Nevertheless, electric utilities remain a tempting target. So perhaps it is not surprising that last July a coalition of eight state attorneys general, led by New York's Elliot Spitzer, filed a class-action lawsuit against five of the largest electric utilities in the nation.1 The suit alleges that the five utilities-American Electric Power, Cinergy, Southern Co., Tennessee Valley Authority, and Xcel Energy-which operate numerous coal-fired generating plants, are harming the states' residents because of the plants' carbon dioxide (CO2) emissions. The suit deems these plants' emissions, said to account for 10 percent of all carbon dioxide emissions in the United States, a "public nuisance" because of carbon dioxide's contribution to global climate change. It demands that these utilities be ordered to reduce their CO2 emissions by an unspecified amount, although it suggests that a 3 percent annual reduction would "achieve a fair share of the carbon dioxide emission reductions necessary to significantly slow the rate and magnitude of warming."
Moreover, the suit alleges that these five utilities all have "practical, feasible, and economically viable options for reducing CO2 emissions without increasing the cost of electricity to their customers," including "changing fuels, improving efficiency, increasing generation from zero- or low-carbon energy sources such as wind, solar, and gasified coal with emissions capture, co-firing wood or other biomass in coal plants, employing demand-side management techniques, altering the dispatch order of their plants, and other measures." This latest lawsuit follows on the heels of a December 2002 lawsuit filed by Spitzer, which sought to force many of these same Midwest utilities to install state-of-the-art pollution-control equipment under the Clean Air Act's New Source Review requirements.
CO2 emissions from power plants are not regulated under the Clean Air Act or any other legislation. Thus, the lawsuit contains no allegations that these five utilities have operated their power plants in any way that is unlawful. Indeed, the lawsuit might be seen as a regulatory end-run to achieve the ends sought in the states' previous December 2002 lawsuit, which targeted pollutants that are regulated under the Clean Air Act. Otherwise, if the goal was simply to reduce CO2 emissions, the states could have passed legislation to reduce emissions within their own borders.
Regardless of the