Northeast Power Markets: Transmission and Generation Siting, Exercise of Eminent Domain Powers, and Greenhouse Gas Controls Mid-Atlantic Power Markets Forum Baltimore, MD September 28, 2006 Presentation by: Ashley C. Brown Executive Director, Harvard Electricity Policy Group John F. Kennedy School of Government Harvard University Of Counsel, LeBoeuf, Lamb, Greene and MacRae, LLP
HISTORICAL CONTEXT: Transmission Issues Context Holy Trinity of Issues: Pricing, Access, and Siting Pricing: Being Seriously Addressed Access: Resolved Siting: Not Yet Addressed 2
The Dilemmas in Siting 3
BALANCES TO BE STRUCK Cost Benefit Symmetries and Asymmetries Non-Economic Issues Economic Context of Siting Eminent Domain Issues Local vs. State, vs. Regional, vs. Federal Jurisdiction 4
COST BENEFIT SYMMETRIES AND ASYMMETRIES Symmetrical Winners and Losers Broad Social Benefit/ Broad Social Cost Narrow Social Benefit/ Narrow Social Cost Asymmetrical Winners and Losers Broad (Distant) Social Benefit/ Narrow (Local) Social Cost Narrow (Local) Social Benefit/ Broad (Distant) Social Cost 5
EFFICIENCY AND EQUITY ISSUES: WHO WINS? WHO LOSES? Efficiency Benefits to Winners Compensation for the Losers? Efficiency Losses Diminish/ Destroy Benefits Who Compensates for Losses? 6
NON-ECONOMIC ISSUES Options Relative Standard Depending on Importance of Project Standards Remain the Same, Regardless of the Project s Importance Weighing Criteria Distinguishing NIMBY from Substance Balancing Disparate Benefits and Costs 7
ECONOMIC CONTEXT OF SITING Cost Recovery Need Determination Monopoly Facility Implied, If Not Explicit Must Be Demonstrated Competitive Facility No Unclear Meaning 8
EMINENT DOMAIN ISSUES Who Can Exercise the Power? Regulated Utilities Unregulated Companies (e.g., Cellular Towers) Derivation of Power Local State Federal Relationship to Siting Obtained from Legal Status, Regardless of Siting Obtained Upon Siting Approval 9
JURISDICTIONAL ISSUES Relationship Between Impact and Jurisdiction Bifurcation of Need and Routing Local Zoning and Ordinances State Siting Laws (Preemption of Local Authorities) Regional Siting (e.g., Compacts, Joint Boards, Regional Agencies) Federal Siting 10
Siting: The Current State of Play 11
CURRENT JURISDICTIONAL STATUS FOR SITING Pre-2004: Limited Federal authority (e.g. federal lands, river crossings) with Scattered Agency Jurisdiction Post 2004: National Corridors State Powers 28 States Have Siting Statutes Local Role in the Remaining States 12
LEGAL STATUS OF EMINENT DOMAIN Very Limited Federal Power States: Majority Position: Comes with Legal Status as Utility Minority Position: Obtained with Siting Approval 13
PURPOSE OF SITING LAWS 1. Preemption of Local Powers 2. One-Stop Shopping with Jurisdictional State Agencies 3. Coherent and Transparent Decision-Making Process with Formalized Public Input 14
HISTORICAL REASONS FOR JURISDICTIONAL ARRANGEMENTS 1. Local Nature of Electric Utilities 2. Vertically Integrated Nature of Electric Utilities 3. Reliability Backup and Trading of Relatively Recent Vintage 4. Monopoly Status of Utilities 5. Policy Reluctance to Use Eminent Domain for Private Purposes 15
NATURE OF SITING PROCESS 1. Establish Need 2. Establish Prudence of Utility Planning/ Exposure of Consumers to Increased Costs 3. Non-Economic Review (e.g., Environment, Health, Aesthetics) 4. Route Approval 16
DEFINITION OF NEED Historical Definition: Necessary for Provision of Service by Monopoly Provider Definition in Competitive Market: Uncertain but Necessary Seems Archaic 17
CONTEXT OF NEED Tampa Electric et al. vs. Joe Garcia et al. (Florida Supreme Court, April 2000) 1. Limited to Florida Utilities Serving Florida Customers 2. Requires 100% Contractual to or Service Obligation by Florida Utility 18
CONTEXT OF NEED TransEnergie Application to Connecticut Siting Council (March 2001) 1. In-State Need Paramount (out-of-state benefits = lesser magnitude of importance) 2. Beneficial Competitive Effects Weighed Very Lightly 19
CONTEXT OF NEED Point of Pines Beach Association vs. Energy Facilities Siting Board et al. (Supreme Judicial Court of Massachusetts, January 1995) 1. Relevant Need = Within the Commonwealth 2. Existence of Power Purchase Agreement Does Not Establish Need (Contract Must be Proved to be the Product of Market Forces ) 20
CONTEXT OF NEED Mississippi Power and Light vs. Louis A. Conerly et al. (Supreme Court of Mississippi, October 1984) 1. Eminent Domain Powers May Not Be Exercised Unless Mississippi Customers are Benefited. 21
PAROCHIALISM/RESPONSE TO EMERGENCE OF COMPETITIVE MARKET 1. Only Tiny Minority of States Statutorily Require Consideration of Neighboring States Needs. 2. Minority of States Have Modified Definition of Need to Reflect the Rise of Competition. 3. 22 States Lack Any Coherent Siting Regime, Often Allowing Local Interests to Block. 4. Most States Look at Benefits Primarily in Internalized Terms. 22
DYNAMICS OF EXISTING REGIME 1. Discourages Investors From Seeking Approval of Facilities That Cross Multiple States. 2. Do Not Reflect Current Structure and Scope of Electricity Markets or Transmission Planning. 3. Effectively Skews Resource Choices in Favor of Course of Least Resistance Rather than Economic Optimization. 4. Provides Effective Tool for Monopolies to Impede and Perhaps Prevent New Entrants. 23
JURISDICTIONAL ISSUE 1. Should States Retain Primary Say Over the Siting of Facilities With Multi-State Implications? 2. Should Need Determination be Made by an Entity With a National or Regional Perspective? 3. Should Multi-State Facilities be Entitled to Same Exercise of Eminent Domain Powers as are Intra-State Facilities? 24
OPTIONS 1. Complete Federal Preemption (relevant federal agencies?) 2. Regional Compact/Joint Board Approaches 3. Bifurcation: FERC Determination of Need/ State Decides Actual Route Within Time and Cost Constraints -- Expansion of National Corridors Concept 25
RGGI and Northeast Electricity Markets 26
WHAT IS RGGI? Seven states in the Northeast have agreed to develop a cap and trade program to stabilize carbon dioxide emissions from electricity generators until 2015 and to then reduce emissions 10% between 2015-2018. States are allocated allowances based on several factors, including actual emissions (2000-2004), electricity consumption, and population. States have the flexibility to decide how they will allocate those permits. Most states will distribute 75% to the industry and the public sector will sell the other 25%. continued 27
WHAT IS RGGI? (cont.) The proceeds from the sale of the 25% will be used to fund strategic energy programs, such as energy efficiency program, the development of new energy technologies, and payments to certain ratepayers. Limited offsets allowed for predetermined categories of projects within the region and under certain circumstances, for a larger menu of opportunities outside the region. Cost safety valve thresholds trigger more generous access to offsets and longer compliance periods. 28
BENEFITS EXPLICIT Put states ahead of others that will have to do more later. Implementing CO 2 reductions today will avoid having to take more expensive measures later. Promote energy efficiency, renewables, and new technologies. Offer an opportunity to experiment with procedures and initiatives that might be considered in a national program. 29
BENEFITS IMPLICIT Will put additional pressure on the White House and the Congress to act. 30
COST PROJECTIONS The proponents claim that the costs will be negligible 0.3%-0.6% increase in rates by 2015 or no more than a $16 increase for homeowners. In both California and in the RGGI states, proponents argue that economic growth will increase and thousands of jobs will be created. 31
COSTS WILL DEPEND ON FUEL MIX AND DESIGN OF PROGRAM For the Northeast, fluctuations in the natural gas prices will dwarf any economic or ratepayer effect from the RGGI program. Impacts will depend on two key variables: 1. The method by which allowances are allocated. 2. The degree of competition in the region. 32
ALLOCATING THE ALLOWANCES Three Options: 1. Grandfathering Historical Emissions 2. Generation Performance Standards 3. Auction with Revenues Recycled by the Government What Part of the Industry Must Hold the Allowances Generators or Load Serving Entities? Will Allocation be Updated Periodically? 33
COMPETITION The Northeast has basically embraced wholesale competition and, for larger sources, retail competition. The marginal price sets the market and for most of the year that price is driven by natural gas costs. In a competitive electricity market, carbon allowances become a valuable asset. The market value of these assets will be much greater than the cost of compliance. 34
CHOICE OF ALLOCATION METHOD HAS LARGE DISTRIBUTIONAL IMPACTS Value of an allowance to a generator is its opportunity cost minus the liability of the cost of reducing emissions. In a competitive market in which the marginal cost sets the clearing price, firms will attempt to charge customers for the value of the allowances, as they would any other opportunity cost. Hence grandfathering involves a large distributional shift from consumers to producers. Competition will not always allow firms to pass through the entire asset value of the allowance. 35
AUCTIONING THE ALLOWANCES RFF studies show that electricity prices will be higher under an auction approach, but the efficiency gains will be significantly greater relative to grandfathering. Auctions will raise significant revenue and how this revenue is used will determine the net economic impact of the program. 36
NEW GENERATION Allowances will serve as subsidies to low or non emitting sources, hence, all other factors being equal, one should expect more renewables, gas-fired facilities, and nuclear power plants (however the latter is unlikely for other reasons). Two problems will emerge: leakage and lack of fuel diversity. 37
LEAKAGE If there are no transmission constraints and all other factors are neutral, new generating plants will locate outside the RGGI states. (RFF) This could theoretically lead to the anomaly of the RGGI states foregoing building a gas-fired facility and purchasing power from a new Midwest coal facility thereby increasing carbon emissions. Renewable facilities would be an exception, especially if states made them eligible for allowances. However, siting large scale renewables seems to be a challenge in densely populated areas. Imported power from Canada will increase. RGGI will be only one of several factors pushing the Northeast states in this direction. 38
LACK OF FUEL DIVERSITY High natural gas prices have caused retail electricity prices in the RGGI states to increase dramatically. Under RGGI, the region may find it difficult to attract investment in options other than natural gas, renewables and imported power. As a result, regional wholesale electricity prices may become even less competitive. 39
OTHER What will be the impact of RGGI on the availability of ancillary power? Will RGGI effect merit order dispatch? Will RGGI be able to integrate seamlessly into a national program, if and when one occurs? 40
CONCLUSIONS ON RGGI How one designs a regional carbon trading regime will have a significant effect on both its economic cost and its distributional impact. Leakage will be a major problem for any regional climate reduction program. There will be benefits but only a small portion of them will be captured by the ratepayers in the implementing states. 41