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Business Observer Thursday, Sep. 17, 2009 10 years ago

Power Grab

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Regulating reductions in greenhouse gas emissions puts more control of energy markets in the hands of government in a mandated “market”-based cap-and-trade system.
by: Jay Brady Government Editor

Regulating reductions in greenhouse gas emissions puts more control of energy markets in the hands of government in a mandated “market”-based cap-and-trade system.

Federal greenhouse gas legislation, known as cap-and-trade, is estimated from 2012-2035 to destroy an average of 67,000 Florida jobs each year.


The Heritage Foundation, a conservative Washington D.C. think tank studying the issue, also says the bill will lower Florida's gross state product by an annual average of nearly $17 billion and raise electricity prices by an average of $829 per household over the 24 years.


The country will be $9.4 trillion poorer by 2035 according to the research, which concludes that “... the future for the American homeowner, small business owner and farmer will be particularly bleak.”


The 1,427-page Waxman-Markey climate change bill (H.R. 2454) barely passed the House June 26 and is on the way to the Senate where its fate is questionable.


And a redundant Florida state version to control carbon emissions, on a parallel track with Waxman-Markey, now treads water while waiting for action on its bigger brother. The state's own consultant thinks a Florida-only carbon regulation is a bad idea on multiple counts.



Legislating recession


Either way, if one of the measures passes, the state's economy could be in for another shock just as it's coming off the mat in 2012 when the restrictions may first apply. The Heritage Foundation estimates that under Waxman-Markey, a family of four will spend an additional $302 per year between 2012 and 2035, just for gasoline.


David Kreutzer, senior policy analyst in energy economics and climate change with The Heritage Foundation, says “we're legislating a permanent recession.”


When asked if federal control over energy under Waxman-Markey would give the federal government control over the whole economy, Kreutzer responded, “Absolutely.”


Cap-and-trade regulations set maximum emissions of greenhouse gases with carbon dioxide (CO2) being the primary target. To cap the emissions, the laws require emitters to get permits, or “allowances”, for each metric ton of greenhouse gas. Over time, the caps get lowered, thereby forcing efficiencies and giving value to allowances needed by other emitters, which can be traded.


The general theory is that tighter caps result in higher carbon prices because they translate directly into a lower supply of CO2 allowances. The lower the cap, the higher the cost of generating electricity from greenhouse gas-emitting sources.


Tampa Electric Co., in a June 16 letter to the Florida Department of Environmental Protection about the state initiative, says the department “over simplifies many of its assumptions, which lead to erroneous conclusions.”


TECO, with 625,000 residential, commercial and industrial customers, argues that the result would be that lower income consumers would receive disproportionately more funding.


In their letter to the state, TECO's director of environmental health and safety, Paul Carpinone, writes, “Consequently, business and industries, which provide tax revenues and jobs, will bear a greater cost burden that may have a negative effect on Florida's economy.”


The five-page letter is one of many responses to a May 19 rulemaking workshop, the latest in a two-year series of DEP meetings on the subject.


How those allowances are paid for is a key issue, but only one of many major issues currently debated by electric utilities, regulators and others.


TECO favors direct allocation of allowances, but FPL favors the auction method as does the Natural Resources Defense Council and the Southern Alliance for Clean Energy. One key reason the environmental groups oppose Florida's approach is that the DEP is leaning away from auctions and toward free allocation.


Auctions are used by the Regional Greenhouse Gas Initiative, the first market-based, mandatory cap-and-trade program in the U.S. to reduce greenhouse gases. Its first auction was a year ago.


RGGI is being used as a template for Waxman-Markey. But in its latest quarterly auction on Sept. 9 the price dropped by 32% since June, demonstrating severe volatility.



'Opportunities for loopholes'


But it's not just big, private electric utilities and environmental activists with concerns. The Florida Municipal Electric Association represents 34 municipally owned and operated electric utilities from Key West to Blountstown, though none are along the Gulf Coast. Combined, the group ranks as the third largest electric utility in the state behind FPL and Florida Progress.


In their presentation at the May 19 meeting, the association's executive director, Barry Moline, pointed out that other options exist to a cap-and-trade program — such as a carbon fee — that European Union carbon markets crashed (the price went from more than $30 a ton to zero two years ago), and with consumers hurting “(greenhouse gas) control regulations MUST be sensitive to cost impacts on customers.”


Moline is no fan of cap-and-trade and it's easy to see why. An April 2007 Washington Post story about Europe's attempt states “...the approach has been a bureaucratic morass with a host of unexpected and costly side effects and a much smaller effect on carbon emissions than planned.”


But while admitting there are a lot of ways to go about it, he also says “there's a lot of opportunities for loopholes” and ways for the supply of allowances to be manipulated as occurred in Europe leading to the crash. Moline also believes certain electric utilities are looking for competitive advantages over other utilities not as well positioned benefit from a cap-and-trade system.


TECO, for example, wants the system to recognize “early reduction activities” meaning getting credit for repowering one of their coal plants to natural gas more than five years ago. That conversion gives them a 25% reduction in greenhouse gas emissions from system-wide levels emitted 10 years ago.


Progress Energy also converted one of its plants in the region to natural gas and would like to benefit from that move under cap-and-trade. Spokesperson Tim Leljedal says the utility is looking forward to building their new nuclear plant in Levy County so they can retire the oldest coal units in Crystal River. That should give Progress Energy a leg up on the competition, earning them valuable allowances under cap-and-trade.


Their customers might not fare as well, however, though much is still uncertain about either the federal or state initiatives. In any event, Leljedal says, “We understand it will increase energy costs for all energy users in the future.”



'The last thing we need'


Lejedal's assessment jives with The Heritage Foundation's study of the impacts of Waxman-Markey, and its implications for Florida and other states.


First, The Heritage Foundation research data are averages over the 2012-2035 period — for example, the $17 billion average drop in Florida's gross state product. But the study also shows significant declines in gross state product over time, so by 2035 it's reduced by $28.3 billion.


Similarly, by 2035 Floridians will see their electric bills rise by $1,607 to about $4,000 a year, and gas prices rise by $1.33 a gallon, due solely to Waxman-Markey.


With the economy contracting as energy prices rise, the study predicts “employment will take a big hit.” In 2012, job losses will be more than 96,000 higher than without the federal bill, and after a period of smaller losses until 2020 the number will rise steadily to nearly 128,000 in 2035.


For all nine congressional districts of the eight counties along the Gulf Coast the study predicts declines in gross state product, personal income and jobs. That may explain why eight of the nine representatives from the Gulf Coast, all Republicans, voted against Waxman-Markey which passed the House 219-212.


Of the Gulf Coast House members, only U.S. Rep. Kathy Castor, D-Tampa, voted for the bill.


Across the state's 25 congressional districts, that voting pattern was mirrored with a party-line vote of 15 Republicans opposed, nine Democrats in favor, and one not voting (U.S. Rep. Alcee Hastings, D-Miramar).


After the vote on the bill, U.S. Rep. Vern Buchanan, R-Longboat Key, issued a press release citing a study from the National Black Chamber of Commerce claiming “the overly ambitious plan will cost 2.5 million American jobs.” The National Federation of Small Businesses also strongly opposed the bill.


FPL, however, which touts itself as “the largest renewable energy business in the nation,” thus stands to gain a competitive advantage by supporting cap-and-trade because the utility is already doing the very things that cap-and-trade is designed to encourage.


According to their director of corporate communications, Randy Clerihue, FPL sees the more market-based approach of cap-and-trade as a lesser of evils. That's because, he says, as a regulated utility it fears the “blunt instrument” of the U.S. Environmental Protection Agency and “their command and control regulations.”


In a speech last February to the National Association of Utility Regulatory Commissioners, FPL's chairman and CEO, Lew Hay, outlined a seven-point proposal, including asking for “a fair allocation of emissions allowances.”


And that is where the federal government takes control of energy markets and ultimately the whole economy as The Heritage Foundation's Kreutzer fears. By controlling the supply of allowances, the government controls energy prices and by extension the U.S. economy to a great degree.


Europe's experience has already shown the problem with that approach.

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