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Can We Afford Climate Regulation?

Lawmakers are rushing a costly decision.

Fortnightly Magazine - December 2009

wound, climatologist Chip Knappenberger of New Hope Environmental Services says that emissions reductions as mandated by the House legislation likely would lower temperatures by only 0.09 degrees Fahrenheit— i.e., not quite 1/10th of a degree—by 2050, and thus won’t produce the desired long-term climate results. 4

According to the Congressional Budget Office (CBO), the net impacts of the legislation will depend on household income levels, with lower income households footing less financial burden than higher income households. 5 In fact, the CBO report states that those in the lowest income quintile actually are expected to realize a net benefit of $40 a year, while those in all other quintiles can expect to see average net costs of varying amounts of as much as $345 a year (individual customer usage will affect actual costs). The CBO report projects that the average U.S. household will see an annual increase of $165 to $175, approximately $14 a month by 2020, as a result of the cap-and-trade provisions of H.R. 2454.

Many observers believe the CBO report low balls the true cost, however. A July 2009 post by Investor’s Business Daily notes that, “the CBO’s own numbers do not compute.” 6 The post further states that the report makes unrealistic assumptions and doesn’t consider the impact on GDP or of human and economic behavior.

Following its analysis of H.R. 2454, the Environmental Protection Agency (EPA) estimates that the proposed legislation will cost a U.S. household an average of only $80 to $111 a year over the period 2010-2050. 7 But the analysis admits “there are many uncertainties that affect the economic impacts of H.R. 2454.” These uncertainties, the analysis states, include: 1) the degree to which new nuclear power is technically and politically feasible; 2) the availability of international offset projects; 3) the amount of GHG-emissions reductions achieved by the energy efficiency provisions of H.R. 2454; and 4) the impact of output-based rebates on energy-intensive and trade-exposed industries. 8

Clearly, predicting the actual costs of addressing carbon issues is not an easy task.

Varying Electric Costs

Regarding the effects on electric utility costs specifically, the picture doesn’t appear to get much clearer. Generally, it’s believed that legislation might be most damaging to areas heavily reliant on fossil fuel, especially coal. The Electric Reliability Council of Texas (ERCOT) undertook an analysis in May 2009 of potential impacts and concluded that its residential customers could see an increase of $27 per month by 2013. 9 With increased wind generation across the state or lesser demand as a result of higher wholesale costs, however, ERCOT believes this monthly increase could be somewhat less.

Some environmental critics argue that the ERCOT study failed to consider carbon offsets, energy efficiency or the impact of renewable energy beyond what’s already planned in the current bill, all of which should bring that cost down.

For El Paso Electric—a relatively small investor-owned utility serving 367,000 customers in west Texas and southern New Mexico—if the CBO report is assumed to be accurate and given the company’s demographic breakdown of income (with an approximate $35,000