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A National Meltdown

Discordant global-warming solutions may end up burning utilities.

Fortnightly Magazine - October 2006

California Gov. Arnold Schwarzenegger’s surprise move in September to regulate his state’s carbon emissions has the entire industry buzzing over what might come next, such as a national carbon plan. California’s legislation to reduce carbon-dioxide (CO 2) emissions by 25 percent by 2020 is forcing a renewed debate over global warming that some believe may force Congress to move forward with a national plan. Such thoughts are fueled by grave concerns over the alternative—that states, left to their own devices in regulating carbon, will pass a patchwork of inconsistent rules that harm the economy.

How will utilities in the next 10 years manage a multi-billion-dollar infrastructure buildout, higher interest rates/cost of capital, diminishing free cash flows, state renewable mandates, and political pressures to keep rates or power prices low, all while complying with carbon emissions programs that emphasize higher-cost fuels?

This question will define the utility industry. Meeting the challenges may depend on whether a national carbon program that regulates carbon emissions is established.

The Ups and Downs of the RGGI

The Regional Greenhouse Gas Initiative (RGGI), a coalition of Northeastern and Mid-Atlantic states working toward a mandatory greenhouse-gas program, has come under fire from a number of quarters. Massachusetts Gov. Mitt Romney last year pulled his state out of the RGGI in favor of another plan, believing the RGGI would be overly burdensome to businesses. Furthermore, a report by law firm Latham & Watkins described concerns over the leakages that have plagued the RGGI process:

“RGGI state utilities may face increased competition if their costs rise and their customers can purchase cheaper energy from states which are not part of RGGI. Importation of power from unregulated sources has the potential to counterbalance some or all of the in-region emissions reduction, as well as to increase the economic impact of the RGGI program on RGGI state resources.”

The RGGI has promised to monitor for these leakages, but how enforceable can a carbon program be when one state in the region has left the program and several have not wholly committed to joining? States such as coal-rich Pennsylvania are listed as mere “observers.” And with Northeast markets extremely integrated, the difficulties in policing such behavior are all the more apparent.

To RGGI’s credit, the organization has been actively engaging the industry on solving this leakage issue and is to issue a report in July 2007. Beginning in 2009, RGGI will cap CO 2 emissions from power plants in the region at current levels—121 million tons annually— with the cap remaining in place until 2015.

Latham & Watkins notes that the absence of readily available CO 2 control technologies means that the RGGI-regulated entities must switch fuels, buy allowances on the market, or invest in projects to “offset” or generate allowance credits or compliance. “If the offset provisions are overly complex or restrictive, higher allowances and energy prices may result, and it may be more difficult for generators to expand to meet growth in power demand,”

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