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Policy Shift: 2009 Law & Lawyers Report

Legal and regulatory changes are transforming the industry.

Fortnightly Magazine - November 2009

allowances.”

Political realities likely will determine whether the legislation evolves in that way. At this writing, lawmakers still were wrangling over basic structural issues, including whether, and how many, credits will be allocated for free versus auctioned off, and what the government will do with the revenues generated in an allowance auction. Draft legislation sponsored by Sens. Barbara Boxer (D-Cal.) and John Kerry (D-Mass.) would auction 25 percent of emissions credits each year from 2012 through 2050, raising revenues intended to reduce the federal budget deficit. By comparison, the Waxman-Markey bill would auction 15 percent of allowances starting in 2011, with proceeds directed toward programs for low- and moderate-income taxpayers.

“My fear is that we’ll see allocations not necessarily based on rational economics or concern for the environment, but on the ability of those in Washington to influence Congress,” Pataki says. “This is why I think it’s critical for any process to be revenue neutral, and not used to create revenue for the federal budget.”

While the political wrangling continues, the industry finds itself in the uncomfortable position of needing to invest in new infrastructure but not knowing yet how GHG regulation and RPS requirements will change the economics of various alternatives. The only thing that seems certain is that the transition will bring rising prices.

“Reliability costs money,” says John McGrane, a partner in the energy practice at Morgan Lewis. “If you’re shutting down coal plants, building windmills and installing new transmission lines, it’s going to be expensive.”

Paying for those costs would be difficult in any economic environment. In the current ailing economy, energy consumers demand that companies and regulators allocate costs in ways that result in both fairness and efficiency. Thus, the industry is tackling the momentous challenge of climate change in the same way it addresses every challenge—namely, by designing the most effective regulatory framework that can be created in a pluralistic society.

Green Highway

With the possible exception of GHG regulation, no aspect of the industry’s transition has generated more vigorous argument than transmission cost allocation. In some sense, transmission policy represents a crucible containing all the factors in the green-energy revolution.

“The overriding issue now, especially in the organized markets, is whether there’s enough money in the system to do what the policy makers want done,” says Bob Fallon, a shareholder with Leonard Street & Deinard. “They want clean-burning generation for energy security, but the system is built with technology from the 1960s and ’70s. I don’t think the capacity and energy markets will generate the amounts of revenue that people need to build all the new assets that are needed.”

Resource planners at all levels are constrained by the limitations of today’s transmission systems—and by the cost of building new ones. The effort to update and expand the transmission system to achieve energy policy goals has brought fierce conflict—most notably at the boundary between federal and state regulatory authority. During the past year, that process has yielded some new policies for fairly and effectively distributing incentives and costs for transmission investments. But at the same