To my knowledge, Colorado is the only state in which regulators allow utilities to incorporate a carbon tax into the economic models used to make resource acquisition decisions (see here and here). Ratepayers can’t see it in their monthly bill, but the tax is used in the models, and the models dictate spending. It’s the worst kind of virtual reality: The carbon tax leaps from computers to ratepayer wallets.
The Colorado Public Utilities Commission was authorized to allow for a carbon tax in 2008 with the passage of HB 1164 by the General Assembly. The legislation was advertised as an essential component of former Governor’s Bill Ritter’s environmentalist “New Energy Economy,” but, in practice, the carbon tax has served as an accounting loophole through which Xcel Energy, the largest investor-owned utility in the State, has awarded itself big time profits. In a previous post, I explained in some detail how Xcel uses the carbon tax. Here are a few examples:
- One of Xcel’s priorities is winning market share from independent power producers on the wholesale electricity market. Older natural gas plants are Xcel’s fiercest competitors, because they have already paid off their capital costs, so they can bid electricity prices relatively low. The $20/ton carbon tax eliminates this advantage, because new plants are more efficient than older plants. It tilts the playing field to Xcel’s favor.
- In implementing HB 1365, the Clean Air Clean Jobs Act, 2010 legislation mandating fuel switching from coal to gas for almost 1,000 megawatts of electricity along the Front Range in Colorado, Xcel used the $20/ton carbon tax to obfuscate the price impact. The carbon tax inflated by scores of millions of dollars the baseline rate against which the costs of the law were calculated.
- On HB 1001, Colorado’s renewable electricity standard, Xcel employed the $20/ton carbon tax to circumvent the 2% rate cap that lawmakers had implemented to protect consumers. The effect of the carbon adder is to significantly expand Xcel’s annual expenditures, which increases the pool from which the company can reap profits.
A recent flip flop by Xcel demonstrates the utility’s cynical manipulation of the carbon tax. As part of the 2007 Electric Resource Plan, Xcel committed to building a 250 megawatt concentrated solar power plant in the San Luis Valley in southern Colorado. That deal was finalized in late summer, 2009. Less than a year later, in June, 2010, Xcel petitioned the PUC for permission to abandon its commitment to build the plant.
Investor-owned utilities like Xcel play a delicate balancing act when it comes to capital expenditure. Generally speaking, the more Xcel spends, the more profit it makes, so it has an incentive to press for as much capital construction as possible. However, if the utility builds too much, and prices rise too fast, then it risks a backlash from the legislature, which could lead to the enactment of policies inimical to the utility. The 250 megawatts of concentrated solar power was so ridiculously expensive that Xcel realized it could upset this balance, and thereby risk blowback from the General Assembly.
Altering an Electric Resource Plan is no small matter. There are serious due process issues inherent to unilaterally changing a PUC-approved order. So Xcel needed a good reason for backing out of the solar deal. Specifically, it had to demonstrate that solar power is egregiously cost-ineffective relative to conventional power generation.
For accounting purposes, Xcel calculates the cost of renewable energy relative to natural gas generation. And in calculating the cost of natural gas, Xcel should be bound by the procedures established by Phase 1 of the 2007 Electric Resource Plan, which included, for the first time, the carbon tax. But that would have harmed Xcel’s argument, because the carbon tax would make gas much more expensive vis a vis a carbon free energy source, like concentrated solar power. So Xcel dropped the carbon tax. Here’s how Xcel’s Kurtis J Haeger, Managing Director of Wholesale Operations, justified Xcel’s decision in April 14, 2011, testimony before the PUC.
“We attempted to use the approved resource planning methodologies and factors from the last resource plan as we are directed to do…and in this case, the assumption used in the ’07 Resource Plan was for a carbon tax or carbon proxy to go into effect in 2010. Sitting in 2011, I know that didn’t happen…We updated the assumptions because the carbon assumption we had in the original modeling was not valid anymore.” [Transcript from April 14 PUC hearing, p 19 lines 19-21, 25; p 20 lines 1-4, 12-14]
This rationalization is bogus. It’s been apparent that the Congress won’t put a price on carbon since the fall of 2009, when the Senate shelved a cap-and-trade scheme that had been enacted by the House the previous summer (the legislation was the American Clean Energy and Security Act), yet this didn’t stop Xcel from using the carbon tax in its models.
Fattened profits are a much more plausible reason for Xcel to suddenly flip-flop on the carbon tax. Quite simply, when use of the carbon tax benefited Xcel, the utility wanted to use it. And now that the carbon tax no longer benefits Xcel, the utility doesn’t want to use it.
William Yeatman is an energy policy analyst at the Competitive Enterprise Institute
What is HB 1291?
On Monday, by a 58-7 vote, the Colorado House of Representatives passed HB 1291, legislation that approves the Air Quality Control Commission’s Regional Haze State Implementation Plan. HB 1291 comes before the Senate State Affairs Committee next Tuesday, April 19.
What is a Regional Haze State Implementation Plan?
In the 1977 Clean Air Act Amendments, Congress created a regulatory program, known as “Regional Haze,” to improve visibility at national parks and wilderness areas. Due to the high uncertainty of visibility science, however, the EPA didn’t have the technical understanding necessary to enforce the Regional Haze provision. In 1980, EPA deferred promulgating Regional Haze regulations until the science improved.
Ten years later, the Congress appropriated funds for a scientific study of visibility that could be used to create Regional Haze regulations. The resultant study provided sufficient scientific grounding for the EPA to promulgate substantive regional haze regulations, in 1999.
As is always the case whenever the federal government issues a new regulation, affected interests immediately litigated. Due to the ensuing delay, it wasn’t until December 2007 that states were required to submit to the EPA a strategy to reduce emissions that impair visibility in order to comply with regional Haze. Such a strategy is known as a Regional Haze State Implementation Plan.
However, only a couple states bothered to submit a Regional Haze State Implementation Plan by the December 2007 deadline. On January 9, 2009, the EPA made a finding of failure to submit all or a portion of their regional haze State Implementation Plans (SIPs) for 37 states. This notice started a two-year countdown to a new deadline for regional haze state implementation plan submissions. January 9, 2011 was the second deadline. As was the case with the previous deadline, most states failed to meet it, although all Regional Haze State Implementation Plans are expected to be submitted to the EPA this spring.
Key facts about Regional Haze:
- It’s an aesthetic regulation—NOT a public health regulation
- States have an unusually large discretion under Regional Haze compared to other Clean Air Act Provisions
Why Did the House Move So Fast on HB 1291?
From wire to wire, HB 1291 was introduced and enacted in 13 days, with virtually no serious debate. The absence of substantive deliberations is notable, in light of the fact that billions of dollars were at stake, and, moreover, that the legislation likely violates existing Colorado statute (more on that later).
Republican lawmakers in the General Assembly will have a rare opportunity to repeal an energy tax this Monday, when the House Agriculture, Livestock, and Natural Resources Committee is scheduled to take up Representative Spencer Swalm’s HB 1240.
Rep. Swalm’s bill targets a surreptitious energy tax that was authorized by the General Assembly in 2008 with the passage of HB 1164, although it’s doubtful that most legislators knew the ultimate impact of what they voted for.
After all, the language of the bill seems innocuous enough. It allows the Public Utilities Commission to “give consideration” to “the risk of higher future costs associated with the emission of greenhouse gases such as carbon dioxide when it considers utility proposals to acquire resources.”
That sounds reasonable, but the implementation has been anything but. While it’s prudent for the PUC to consider the risks of Congress passing a cap-and-trade scheme that would put a price on carbon, it is, in equal measure, rash to include the cost of a federal carbon tax in resource planning that covers a timeframe during which these costs couldn’t exist.
In its most recent Resource Plan, Xcel made acquisition decisions based on an assumed $20 per ton carbon tax from 2010 through 2015, even though it is inconceivable the federal government could have a carbon bureaucracy ready by 2015. And that’s only if Congress passed cap-and-trade legislation tomorrow.
On January 15, the Colorado Department of Public Health and Environment (CDPHE) submitted to the General Assembly a State Implementation Plan (SIP) to comply with the Regional Haze provision of the Clean Air Act. The General Assembly must approve the SIP before it can be sent to the Environmental Protection Agency (EPA) for final review. The CDPHE will seek a rubber stamp, but the General Assembly must reject the proposed SIP, because costs far exceed benefits.
Opposition to the Regional Haze SIP is merited by the CDPHE’s treatment of Hayden Units 1 and 2 in Northwest Colorado. The SIP calls for almost than $140 million in nitrogen oxides (NOx) controls known as Selective Catalytic Reduction (SCR). Here’s why this is a bad deal for Coloradans:
- Costs exceed benefits by a 40:1 ratio
Regional haze is an aesthetic regulation. That is, it has nothing to do with health, and is meant only to improve visibility at national parks. In 2006, EPA Region 8 made a “ballpark” estimate that the value to Colorado residents of reducing a ton of NOx in order to comply with Regional Haze is $95. The CDPHE is mandating pollution controls that cost $3,385/ton NOx reduced at Hayden 1, and $4,064/ton NOx reduced at Hayden
- Even the EPA concedes that SCR is not cost effective
In the Regional Haze guidance document, the EPA stated, “we have not determined that SCR is generally cost-effective.”
- Neighboring states determined that SCR is not cost-effective
In Utah, the Department of Environmental Quality deemed that SCR was too costly, and instead proposed low NOx burners in its Regional Haze SIP. This technology is 95% less expensive than SCR.
- Evidence Suggests the CDPHE grossly overestimated visibility benefits
During the CDPHE deliberations on the Regional Haze SIP, Joseph S Scire, an environmental consultant, testified that the CDPHE’s overly simplistic visibility model “significantly overestimated…the predicted visibility benefits associated with SCR controls.” Such an overestimation would mean that the CDPHE’s preferred pollution controls are even less cost-effective.
“I have a moderate proposal” was how PUC Chairman Ron Binz introduced his interpretation of cost recovery provisions in HB 1365, the Clean Air Clean Jobs Act, legislation that effectively mandates fuel switching from coal to natural gas for almost 1,000 megawatts of base-load electricity generation along the Front Range. It was a very important exegesis. One of the major reasons Xcel agreed to go along with fuel switching was the possibility of ultra-generous rate treatment accorded by the legislation. Yet the language of the law was ambiguous on certain key points, and the PUC was the final arbiter of what these words meant. Millions of dollars hung in the balance.
Chairman Binz pitched his proposal on December 9, during the PUC’s final deliberations on HB 1365, and he was true to his word when he labeled it “moderate.” The PUC Chairman denied many of Xcel’s demands—most significantly, the utility’s insistence on upfront payment, without having to submit to a cumbersome and time-consuming rate case procedure.
Although I disagree with PUC regulation of the electricity industry to begin with (for my take on this matter, click here or here), I don’t think Chairman Binz’s proposed cost recovery regime (which ultimately was adopted by the PUC) is unreasonable. I do, however, disagree with Chairman Binz’s statement that he did “not think highlighting this [HB 1365 costs] on a bill will serve us well.”
Perhaps Chairman Binz was worried about his legacy and was therefore loathe to allow a monthly reminder to more than a million Coloradans of the costs of legislation he helped write. Governor Bill Ritter, too, would be poorly served by a constant reminder that his “New Energy Economy” came with big strings attached.