The Environmental Responsibility of the Regionalizing Electric Utility Industry

Eisen, Joel B., Duke Environmental Law & Policy Forum

Power transactions trading at lowest cost will eliminate certain environmental and renewable resources, which trade above the market clearing power price, unless otherwise protected by government policy. (1)

**********

The invitation to this symposium prompted me to do some serious head scratching. Would I discuss whether "environmental regulations currently act as a barrier to entry in energy markets and whether the current regime strikes the right balance between environmental protection and efficiency"? (2) In this time of massive uncertainty over the future of "energy markets," could environmental laws be the roadblock to progress?

In my view and those of numerous others, (3) progress toward wholesale and retail markets ("restructuring") has slowed through poor design of the regulatory and technical infrastructure and the combination of California, Enron, (4) the uncertain future of FERC's Standard Market Design ("SMD") (5) and Wholesale Power Market Platform ("WPMP") (6) proposals, states grappling with "stranded costs" and other transition issues, and complex problems of market structure and operation. Indeed, some of the same luminaries in the field who are participants in this Symposium will be contributing papers to a symposium early next year on "Realizing the Promise of Electric Deregulation." (7)

Even those who haven't yet given up on restructuring don't put much blame on environmental laws. (8) But that hardly means that there aren't important environmental considerations in restructuring. In this Article, I will address environmental issues in the context of our rapidly evolving understanding of "restructuring." The market for electricity is fast becoming a series of regional marketplaces for wholesale transactions, operating on bid-based systems that move power at the lowest cost. (9) There are plenty of states where power is still delivered as it has been for decades: by "bundled" service provided by vertically integrated utilities. (10) However, the trend is toward regionalization, where independent entities control the transmission grid and play a major role in determining how power is delivered. These market participants, confusingly, have been known by a number of names and acronyms, though the most recent one is "regional transmission organizations" ("RTOs"). (11) The trend toward regional marketplaces continues unabated, even in the face of uncertainty about FERC regulatory efforts. (12)

Environmental laws are not nearly as important as other business considerations in their impact on utilities' decisions to pool their assets. That discussion centers largely on considerations that don't have much to do with environmental laws: whether the profit motive is enough of an incentive for transmission firms to manage the grid properly, ensure reliability, or build new capacity. There is an important set of environmental concerns in the transmission area involving the ongoing controversy over the siting of new transmission lines. As Professors Rossi and Pierce explain in depth in their articles, opponents of new projects can use state and local laws to delay or even stop new transmission lines. (13) So for the moment I will focus on a different intersection of environmental laws and a regionalizing industry: the impacts on generation of electricity.

I. ENVIRONMENTAL LAWS' INFLUENCE ON GENERATION

The electricity system has three parts: generation, transmission and distribution, (14) though the delineations among the three are becoming less clear. (15) Would there be more generators pouring their power into the new regional markets but for environmental regulators and their insistence that pollution be controlled?

Undeniably, the environmental laws make it difficult for some potential entrants in the generation business. A nuclear power plant can take more than a decade to get from the drawing board to operation, and much of that time would be spent in mandated environmental reviews. (16) FERC has not seriously contemplated any new nuclear plants since before I began law school in 1982. (17) Some, of course, might think of this as a salutary effect of environmental laws. Others point to the difficulties associated with getting state-of-the-art natural gas plants on line as evidence of a barrier to entry posed by the environmental laws, and it would be hard to argue that environmental reviews have not played a part in that situation. (18)

Professor David Spence mentions a pervasive fear that existed at the outset of restructuring: that utilities operating dirtier coal-fired power plants in a deregulated environment could sell their output nationwide, thus giving them an incentive to fire up antiquated plants and increase air pollution and adverse environmental effects. (19) The utility industry has the doubly dubious distinction of being one of the nation's most significant polluters and one of the most consistent avoiders, delayers, and subverters of enforcement. (20) The loopholes, intransigence of utility companies, and only moderately successful enforcement record have allowed utilities to operate in the shadow of the law. (21) Thus, it would be dangerous, frankly, to encourage utilities to emit more pollution into the air without regard for the environmental consequences.

Restructuring may or may not have encouraged more pollution; Professor Spence and others have some doubt about that. (22) One reason restructuring took place in the first instance was a flood of new generation entrants, spurred on by the Public Utility Regulatory Policy Act ("PURPA") and Energy Policy Act of 1992 ("EPAct"), that prompted FERC, Congress, and state legislatures to consider the merits of industry-wide competition. (23) A large number of natural gas plants have come on line in the past decade, though the trend slowed recently. (24) If there has been any pervasive impact at all on new generation from environmental laws in restructuring, it may well have been the salutary effect of marginally encouraging the switch from dirtier fuels (principally coal) to relatively cleaner ones (principally natural gas) among new entrants, though market conditions for basic fuels are also important. (25)

Of course, the primary focus on the environmental impacts of generation in a restructuring environment has been a nationwide debate over regulation of utilities under the Clean Air Act ("CAA"). As others and I have pointed out, the CAA New Source Review program has been a lightning rod of controversy and it is hard to imagine that anyone today would seriously contend that it has achieved the objective of controlling emissions from power plants. (26) We have compelling evidence, of course, that it has been a major failure. (27) While it might be worth discussing replacing the existing system of regulation in whole or part with a "second generation" technique such as a carbon tax or cap and trade system, (28) this raises a complex set of issues that would take us well beyond the focus of this Symposium.

II. "ENVIRONMENTAL" LAWS PROMOTING RENEWABLE RESOURCES

I would like to focus on the "barrier to entry" question in another context, namely, governmental policies that promote market entry of renewable resources. In a regional electricity marketplace, the market maker, not the government, presumably decides what electricity gets made and to whom it is sold. Thus, critics have forcefully suggested for over a decade that regulatory devices introducing non-market mechanisms conflict with the fundamental premise of deregulation, whether they are premised on environmental or any other considerations. (29)

Speaking of a barrier to entry in this context is illuminating, though probably not in the sense opponents of environmental mechanisms have in mind. The most common "barrier" is that faced by firms that use renewable resources to generate electricity. …

Questia, a part of Gale, Cengage Learning. www.questia.com
Publication information: Article title: The Environmental Responsibility of the Regionalizing Electric Utility Industry. Contributors: Eisen, Joel B. - Author. Journal title: Duke Environmental Law & Policy Forum. Volume: 15. Issue: 2 Publication date: Spring 2005. Page number: 295+. © 2008 Duke University, School of Law. COPYRIGHT 2005 Gale Group.

This material is protected by copyright and, with the exception of fair use, may not be further copied, distributed or transmitted in any form or by any means.