Will cap-and-trade bill affect Danville power customers?

As members of Congress return to Capitol Hill after Labor Day, they face a major economic and environmental decision that will affect the daily lives of all Americans for years to come: What should be done about climate change?

Most Americans agree that climate change is an issue that must be addressed — but how to do that is a multi-billion dollar question.

Congress thinks it has an answer — create a “cap-and-trade market.” Under this approach, the government first sets a cap on the number of tons of carbon dioxide (CO2) that companies, such as utilities, can emit into the air. The government then auctions or gives away “emission allowances” authorizing releases of specified amounts of carbon dioxide. The proposed cap on emissions is reduced over time, so that the amount of CO2 that can be released also is reduced, thus making the allowances ever more valuable. Companies could trade or sell emission allowances on the market just like other commodities. Experts have estimated that these transactions could amount to more than $100 billion annually. This carbon market would be open to anyone, including financial institutions and speculators. The consumers of electricity will pay these billions of dollars through their utility rates.

Danville Utilities is a not-for-profit public power utility owned and operated by the city of Danville. In conjunction with other municipal electric members of American Municipal Power Inc., including the Virginia communities of Martinsville, Bedford, Front Royal and Richlands, we are embarking on an electricity generation development effort designed to reduce our reliance on volatile wholesale electric markets and yield a balanced, responsible generation portfolio that includes new, cleaner natural gas and coal generation plants, as well as the largest development of new, run-of-the-river hydroelectric power in the United States.

We also are considering additional renewable generation opportunities, including wind and solar. Despite our diverse portfolio, we have a significant stake in the carbon emissions debate and have been following it closely. Because our goal is to provide reliable electric service at the lowest reasonable cost while protecting the environment, the cost of climate change legislation is important to us. In tough economic times like these, when affordable electricity is more important than ever, we don’t want to be faced with passing on disproportionate and unnecessary costs to our customers or sacrificing the quality of our service.

Within a week or two, the U.S. Senate will begin debate on the American Clean Energy and Security Act (HR 2454), a cap-and-trade bill that narrowly passed the House of Representatives on June 26. We commend the members of our House delegation, including Rep. Tom Perriello, D-Fifth District, who worked to help craft improvements to the legislation through the House process. However, essential issues remain to be addressed in the Senate process.

One thing is certain — if Congress is going to try to address climate change by creating a new multi-billion dollar market where some participants will potentially wheel and deal for their full advantage, the program must be structured wisely. The House bill has shortcomings that, if not fixed by the Senate, could result in disproportionate and unnecessary costs that could harm our utility customers, our economy and the reliability of our electric system without providing commensurate environmental benefits.

HR 2454 contains unrealistic emission reduction and technology development targets, insufficient time for a cost-effective response and an allowance allocation structure that disproportionately favors other regions of the country. The legislation also lacks a cap on allowance costs. The legislation, with an estimated price tag that could exceed $3 trillion in the first 20 years, has the steepest greenhouse gas emissions reduction targets of any major climate proposal considered by Congress. The implementation schedule is so ambitious that the responsible regulatory bodies could not properly provide the public comment opportunity needed to successfully and fairly implement the bill.

The purpose of allocating emission allowances should be to cushion retail rate impacts for all customers, but the House legislation creates regional disparities by allocating a portion of the allowances for local electric distribution companies to systems without regard to impact or need. In contrast to our situation, many ratepayers in California and some other West Coast and Northwest states would experience less of a burden from the implementation of the cap-and-trade system under the legislation. These areas of the country are blessed by particular resources, climate or geography — including access to significant hydropower resources. Other regions have utilities with substantial nuclear power that will become more profitable in wholesale markets. Danville Utilities and many other providers in this part of the country that must depend on electricity from coal-fired power plants to satisfy the bulk of their customer needs would be harder hit by the current legislation.

The following are some of the key issues we encourage the Senate to address:

* The need for a ceiling on the price of carbon allowances traded in the market to make sure that a cap-and-trade market does not result in runaway prices that harm consumers or the economy. Some have proposed a ceiling and a floor on the price — termed a “cost collar” — to keep the allowance prices high enough to motivate changes in behavior without harming our economy. Since HR 2454 also contains mandatory reduction targets, emission reductions are going to occur. But carbon allowance prices need to be capped in order to avoid the volatility we have seen in other trading markets and thus limit the risk to electricity customers.

* To further protect consumers from unnecessary price increases, we believe the Senate should make sure that local distribution utilities receive enough allowances to cover their emissions at the start of the program. The House-passed legislation allocates allowances to utilities that have no emissions compliance obligations by granting allowances based on their retail sales. This dilutes the number of allowances available to utilities in fossil-fuel dependent regions of the country to aid their transition and soften the blow to their customers.

* To make sure that unregulated generators do not receive windfall profits at the expense of consumers, it is vital that allowances be allocated only to local distribution utilities that directly serve retail customers. These entities are regulated by state and local governments that can require the value of allowances be passed on to customers. Unregulated “merchant” generators face no such restrictions and could pass that value on to their shareholders rather than customers. The House legislation would allocate up to ten percent of the emission allowances for the electricity industry to merchant generators.

For the sake of the nation’s consumers, public power systems like Danville Utilities firmly believe that Congress needs to make sure such monumental legislation is fair, balanced and affordable. The current legislation does not balance environmental goals with the impacts to the consumers and the economy. We urge Sens. Jim Webb and Mark Warner to fight for these principles.

* Lacy is Danville’s city manager.