Renewable Subsidies in the Age of Deregulation

Fortnightly Magazine - December 1997
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energy in a restructured electricity market?

Renewable resource funding marks a major point of contention in utility deregulation. Environmental groups fear that without some form of compulsion or subsidy, or both, renewable resources will not survive in an energy economy based on least direct consumer cost. However, utilities do not want to be saddled alone with the chore of carrying all renewables to market.

To satisfy the various constituencies, state regulators are mandating the collective maintenance of the so-called "stranded benefits" of renewable energy and demand-side management. The techniques the states are using vary widely - from encouragement to compulsion. But there are legally right, wrong, and highly suspect ways of fulfilling these policy directives.

Many states are plunging ahead to implement the quickest or most controllable option, without analyzing the legality of their initiatives in advance.

California, for example, has earmarked $540 million by legislative action for renewable energy projects. fn1 Legislation in Massachusetts would fund renewable energy development for tens of millions of dollars annually. The Wisconsin Public Service Commission has allocated $210 million annually for energy conservation, development of renewable resources, and support of low-income customer assistance. All of these initiatives would impose a systems benefit charge, a levy on each kilowatt-hour of retail electricity sales, to fund in-state renewable energy development, as an avowed purpose of the programs.

This raises two potential problems. First, the Supreme Court prohibits the imposition of a levy on sales in interstate commerce to subsidize in-state industries (see sidebar, "Tax-Funded Subsidies"). The Supreme Court allows distinctions in the imposition of a tax on fundamentally different regulated and unregulated commodities. However, in a deregulated market, an in-state subsidy funded by levies on interstate electricity sales (especially where the state does not own the generating equipment) is legally suspect (see sidebar, "Home-Grown Favoritism").

A second problem is created when a state relinquishes control to deregulated competition but does not relinquish its preference for how the resultant market treats certain technologies. State regulators may attempt to regulate out of their customary retail waters.

Power Shifts to Federal Level

With deregulation, increased competition and brokers, aggregators and intermediaries, a greater percentage of total power sales will occur at the wholesale level. Retail load should remain relatively constant, but deregulation will "pancake" additional layers of wholesale transactions within the chain of title transfers prior to retail sale. These additional transactions will fall under federal regulation, boosting FERC's power and diminishing the state role.fn2

So if the FERC gains the whip hand, what awaits renewable preferences subject to FERC regulation?

First, states legally are not permitted to regulate the wholesale power market. Renewable technologies will operate in a deregulated wholesale market, selling power to aggregators and marketers. Subsidizing wholesale renewable energy markets injects the state indirectly into tilting prices in the wholesale market. Absent congressional allowance, when a state imposes a retail levy to influence power prices in wholesale markets, it risks transgressing the regulatory divide: States are not allowed to do indirectly what the Federal Power Act prohibits them from doing