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Defining the New Policy Conflicts

Failing to address and adapt to the new ratemaking realities could result in increased costs for the economy.

Fortnightly Magazine - July 2006

not having adequate transmission capacity largely have been hidden but have become more transparent in market environments and are no less real in vertically integrated monopoly environments. New transmission capacity will be needed to move power from new facilities, whether they be coal-fired base-load facilities or renewable energy sources.

If natural gas is to remain a significant fuel for electricity generation, new exploration and production infrastructure will be necessary. This not only includes additional rigs and platforms, but also will include new LNG import facilities as well as new pipeline expansions to handle changing flows of gas from the emerging production and import areas.

Finally, there is uncertainty regarding whether the United States will implement any climate-change policy, and if so, what the details will be of such a policy.

Adaptive Challenges Ahead for Energy Policy

What are the conflicts that have arisen out of these new realities? In Maryland, retail consumers emerging from rate freezes now face prices that are as much as 72 percent higher than earlier. The conflict has been over how to distribute the pain and the risk between the companies and consumers over time. 25 This issue is no different in a vertically integrated environment where, for example, residential customers of Florida Power & Light faced an almost 20 percent increase from rising natural-gas and petroleum prices. 26

In terms of new generation supply and technologies, conflicts involve the availability and reliability of clean-coal technologies, the ability of conservation to reduce future demand, and the nature and cost of environmental damage. Resolving these fact and distribution conflicts is critical to confronting the adaptive challenges of making tradeoffs between acceptable levels and sharing of risk, low energy prices, energy security, and the environment. 27

Siting and permitting processes for new infrastructure also lead to adaptive challenges. Some quality of life and environmental impacts are local, while the wider population enjoys the benefits of the facility.

Costs of Not Addressing the Challenges

In electricity and natural gas there are potentially large and immediate costs for failing to confront the adaptive questions. These costs may be seen in higher and more volatile energy prices than publicly acceptable because of the continued heavy reliance on natural gas as opposed to coal as a generating fuel. Continued avoidance of the underlying adaptive challenges associated with global climate change may risk greater enviromental damage and lead to withholding investment until there is greater policy certainty.

The same holds true for the continued avoidance of authority conflicts, such as jurisdiction over siting and permitting power plants, and an apparent lack of clear authority over offshore drilling.

However, there is progress. EPACT clarified authority over the siting and permitting of LNG terminals and electricity transmission, and it redefined the federal/state relationship. 28 CAIR and CAMR have provided an answer to the environment/cost tradeoff with respect to sulfur dioxide, nitrogen oxides, particulate matter, and mercury emissions.

If there is one lesson that should be taken from the history of utility regulation, it is that delaying adaptive challenges only compounds the problems.



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