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Proposed Guidelines if Greenhouse Gas Allocations go to Local Electric Distribution Companies

Background

The Electric Power Supply Association (EPSA) is the national trade association representing competitive power suppliers, including generators and marketers. The competitive power sector operates a diverse portfolio that represents 40 percent of the installed electric generating capacity in the United States, and much of the new electric power resources currently under development in the country. EPSA members include both independent power producers not affiliated with a utility-owning company as well as competitive generation affiliates of holding companies whose subsidiaries also include a local regulated electricity distribution utility.

Since January 2007, EPSA has been on record as supporting enactment of federal, mandatory, economy-wide, market-based, cap-and-trade legislation to reduce greenhouse gas (GHG) emissions. EPSA looks forward to working with Congress and the Obama Administration to achieve this goal.

The U.S. has hybrid electricity systems that vary by region and state. Some states restructured their electricity systems to separate power generation from its transmission and distribution. Other states retained vertically-integrated utilities that continue to own and operate power generation, transmission and distribution within the same utility company. Competitive wholesale power suppliers have facilities nationwide and under federal climate legislation would need allowances to cover the greenhouse gas emissions from all types of their power plants. Regardless of the regulatory system in which they operate, competitive suppliers' plants are integral to providing reliable and environmentally-responsible electricity to consumers. As Congress fashions the details of federal climate legislation it is important to do so without undermining wholesale power competition. Thus, a portion of allowances allocated to the electricity sector should be reserved for competitive suppliers to address their net compliance costs.
A key point in designing a cap-and-trade program is how to allocate allowances to emit greenhouse gases (e.g., free allocations, auctions or a combination of both), including how to effectively utilize allowance value to mitigate economic concerns. Allowances to electricity generating companies, including competitive suppliers, should be neither over-allocated nor under-allocated. EPSA encourages policymakers to ensure that any greenhouse gas allowance program be fair, equitable and non-discriminatory, including in the treatment of new and existing generation.

With respect to the electric power sector, some have proposed an option that provides free allowances directly to regulated local distribution companies (LDCs) as a means of addressing consumer impacts associated with rising electricity prices. EPSA recommends a series of conditions specific to allocations to LDCs in order to ensure a level playing field exists for competitive wholesale power suppliers if this approach to allowances is adopted in federal climate legislation.

Conditions on Allocations to Electricity LDCs

To the extent that Congress allocates allowances to the electric power sector LDCs, the following conditions should be implemented.

• Each LDC should be required to sell 100 percent of its allocated allowances within a specified time period, which should be consistent with designated compliance periods, and do so for fair market value. This will maximize the value for consumers as intended, provide liquidity in the marketplace and help to ensure a true carbon market exists.


• A national, regional or localized venue (auction pool) to sell these allowances would help to reflect fair market value. A true market is not likely to exist if LDCs are the entities selling the allowances or running the auction.


• If, however, the LDC is given the authority to run the auction, they should not be permitted to provide preferential treatment to their own generation that competes with independent competitive wholesale power suppliers who also need fair access to allowances to operate.


• In order to prevent preferential affiliate dealings, the LDC employees who receive and sell allowances should be subject to appropriate standards of conduct procedures, tailored to the allowance program, that restrict access between affiliates and protect against undue preference and discrimination. Standards of conduct are the way to address such concerns, as is done elsewhere with those tailored to transmission transactions.


• There should be sufficient oversight by State Public Utility Commissions (PUCs) and other control boards to ensure compliance with the requirements of the program.


• The proceeds from the sales of the allowances must not be used to enrich or provide a competitive advantage to the LDC-owned generation or to interfere with the function of competitive retail markets.


• The program should identify specific allowed purposes for the use of all the allowance value. Specifically:
  
• Guidelines should be established by Congress directing the use of allowance value and requiring that LDCs develop plans for and provide regular and transparent reports on the use of allowance value, with sufficient oversight by State PUCs.


• Any revenue from the sale of allocations should be used entirely for consumer benefit without distorting market signals or rewarding increased energy consumption; to do otherwise would undermine energy efficiency goals. For example, funds could be credited to low-income end-use consumers in the form of a discount to the overall monthly bill or used by LDCs to advance energy efficiency and demand reduction programs.

CONTACT: JOHN SHELK
(202) 349-0154or 703-472-8660

EPSA is the national trade association representing competitive power suppliers, including generators and marketers. These suppliers, who account for nearly 40 percent of the installed generating capacity in the United States, provide reliable and competitively priced electricity from environmentally responsible facilities serving global power markets. EPSA seeks to bring the benefits of competition to all power customers.