February 28, 2010

Intergenerational equity, climate change and electricity regulation

Currently, climate change doesn’t really have an impact on the daily lives of most Americans. No imminent food shortages are predicted, no large influx of climate refugees are gathering at the borders, news programs have no images of people’s homes falling into a rising sea and we can still see polar bears if we travel far enough north. In fact, some reports show that most people on Earth may not truly feel the harshest effects of climate change for another twenty or thirty years. And for many, impacts that are too far beyond the horizon make it difficult to justify large early investments even if they avoid future costs.

While the general public may not see over the climate horizon, electricity regulators can. New electricity generation and transmission permitting is controlled by individual states, (with the exception of nuclear power), which have a duty to serve both the current and future citizens. Furthermore, rates for the sale of electricity are regulated by the federal government on the wholesale level and by the states at the retail level. (See the Federal Power Act, 16 U.S.C. § 791- 828). Because of the capital costs associated with building most generation sources, as well as their long life span, regulators must weigh what costs associated with a project are to be paid by ratepayers now and what long term costs should be deferred to future ratepayers.

In making these decisions regulators must weigh the interests of three groups. First, investors who have an interest in recovering their investment in a project over the short term. Second, current ratepayers who have an interest in keeping their rates low and not paying for benefits they may not use in the future. Finally, regulators must protect the interests of future ratepayers who may be burdened by environmental costs in the future that produce benefits now. Balancing these interests and costs is referred to as the concept of intergenerational equity. In the future, intergenerational equity and the costs associated with climate change will likely become more relevant in permitting and rate making decisions.

Electricity generation is responsible for at least one-third of carbon dioxide emissions in the United States and most of those emissions stem from coal fired power plants. These same emissions will impose the costs of climate change on future generations, while current generations will pay nothing and only enjoy the benefits (cheap power) of the emissions. However, most states authorize or require that regulators consider the environmental effects and costs of their decisions and are not restricted from examining costs that may be incurred in the future. For example Vermont’s statute governing electric generation requires utilities to meet “the public’s need for energy services . . . at the lowest present value life cycle cost, including environmental and economic costs.” 30 V.S.A. § 218c(a)(1) (2000).

Furthermore, many state regulators are subject to state laws requiring an extensive environmental review for permitting new generation sources similar to the reviews required for federal actions under the National Environmental Policy Act (NEPA). NEPA also applies to federal rate making decisions and also allows regulators to consider increasing the cost of power to pay for future environmental expenses. Therefore, most jurisdictions are in a position to weigh the potential climate related costs of new generation sources on future ratepayers and can incorporate those costs into whether or not to permit a facility and what rates may be charged to current users.

Incorporating climate related costs into the permitting and ratemaking decisions would immediately increase costs of coal-fired power plants, thereby making renewable sources of energy generation more cost competitive. Incorporating future climate related costs would increase the $10/ton cost of carbon associated with the currently proposed federal carbon cap-and-trade regulation, while at the same time making the costs associated with carbon neutral forms of generation more attractive.

Regulators can reflect the future costs of climate change in their rate making decisions in two ways. First, they cam approximate the costs of climate change in the future stemming from the proposed generation source and incorporate those costs into current rate payments. Secondly, regulators may incorporate the costs of technological improvements that will reduce emissions into the capital costs associated with a new generation source. Either option of making current users pay for the costs imposed on future generations will increase the costs and decrease the viability associated with coal power plants. Such an increase would make the permitting and rates associated with renewable generation more attractive to regulators. Therefore, those interested in the development of clean technologies should be aware of intergenerational equity arguments being made to local regulators and support them.

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