If the Clean Air Act becomes law, it will create a new market for an unusual commodity -- emission credits generated by utility plants -- and new issues for the state commissions that regulate them.
The bills passed by the House and the Senate require utility companies to reduce sulfur dioxide emissions nationally to half the amount produced a decade ago. Utilities that reduce emissions even more than required will receive "credits" that can either be kept for future use or sold to other utilities that may need them. In addition, utilities that have done more than was required by current law to control emissions will start out with credits.
For the utilities and the state commissions that regulate them, this will create a labyrinth of issues.
First, they will have to determine the best course to pursue with credits -- is it better to pay now for more stringent controls (with the costs passed on to customers) to produce a credit that may be valuable to the utility in the future? And if a utility does collect credits, is it smarter to sell a credit while the market for them is high or hold onto them so that they can be used used for expansion?
"It's going to be fascinating," said William A. Badger, a member of the Maryland Public Service Commission and first vice president of the National Association of Regulatory Utility Commissioners. NARUC initially opposed the acid rain provisions of the Clean Air Act because of concerns about the emission credit trading provisions. "Facing the reality that we were going to have it, we tried to go back and say, these are the things that would make it work," said Badger.
One provision the regulatory commissioners proposed was to create a pool of credits to be auctioned off each year as a way of guaranteeing a certain number would regularly come on the market. "We think that's vital to ensure that there's liquidity in the market."
Once a utility creates a credit, the utility should decide with regulatory review the potential uses of that credit, Badger said. For instance, if Baltimore Gas & Electric produced emissions credits, the Maryland PSC would look at whether BG&E might need it in the future to accommodate growth or should hold onto it as a sort of insurance policy in case a power plant goes out of commission -- as BG&E's Calvert Cliffs nuclear plant is now.
In addition, said Badger, the regulators would examine whether any other utility in the state might need the credit in the future. For instance, if Potomac Electric Power Co. or the Delmarva Power Co. were likely to need a credit in the future, the commission might recommend against that credit being sold to an out-of-state utility. Power companies also often are part of interstate complexes of utilities that trade power back and forth in a system that allows the power to be produced by the lowest cost facilities that are available at the moment. Regulators would look next at whether the credit might be needed within those types of systems, said Badger.
NARUC has proposed to Environmental Protection Agency Administrator William K. Reilly that NARUC's research arm and the EPA join together to study the issues that may arise. The group has also proposed that EPA maintain a registry of the credits but allow the Treasury Department to conduct the credit auctions.
Badger said that he expects commissioners will try to examine utility decisions about how to use the credits before the fact, rather than question their prudence after the deal is done. "This kind of review ought to be done up front. That way both the commission and the utility will know exactly what they have available."