Wednesday, March 11, 2009

Did Court Challenge to Legislatively Unauthorized Greenhouse Gas Allowance Scheme Prompt Governor's Concession to Power Plant Owners?

Environmental groups reacted with consternation when Governor Paterson indicated that more RGGI greenhouse gas allowances may be distributed by DEC for the benefit of power plant owners who need to buy permits but who cannot pass through the added costs in their pre-existing long term wholesale power contracts. See Paterson Reconsidering Deal on Plant Emissions, New York Governor Could Rewrite Carbon Trading Rules, Groups Call on Gov. Paterson to Come Clean About Alleged Dirty Deal with Power Plants, Paterson Downplays His Clean-air Position.

In an editorial, The Times suggests there may be a private, "done deal" between the Governor and power producers and laments that his "apparent willingness to listen to only one side of the case raises serious questions about the way he makes decisions." A Need to Clear the Air. Newsday suggests the deal was sealed last September 8 in a meeting with wholesale power producers. See Cap-and-trade Clarity Paterson Needs to Set Record Straight

This latest flap is just another consequence of a dubious and costly program lacking any proper legislative anchor. No one should be surprized it came unmoored with the slightest shift in the winds.

In late January 2009 New York's RGGI program was threatened with extinction in a pending court proceeding brought by a wholesale power producer. The case raises rather substantial claims that the entire RGGI framework, created by the executive branch with no legislative enabling legislation, is illegal. Perhaps the Governor's dispensation to the wholesale power generators is an effort to take away the aggrievement of those who could not just pass the costs on to buyers, and ultimately, to the consumers who must pay the RGGI bills.

Perhaps the move of the Governor will defuse the legal attack by caving in to the power generators and giving them more free allowances, to cover their costs which cannot be recovered in their current wholesale power contracts.

The petition in the case of Indeck Corinth, L.P. v. Paterson alleges:
NYSERDA has predicted that it will receive more than $144 million in 2009, to be disbursed by NYSERDA at its unfettered discretion, with no authorization or appropriation by the New York Legislature. Market observers generally predict that the market clearing price will increase in future auctions, and that as a result, NYSERDA will in future years receive more than $144 million in auction proceeds, all to be disbursed by NYSERDA at its unfettered discretion, with no authorization or appropriation by the New York Legislature.

The New York State Legislature did not authorize the entry into the RGGI MOU by the then Governor, and has not authorized, approved or consented to the RGGI MOU at any time since the execution of the MOU. The New York State Legislature has not authorized DEC to create a tradable allowance program to control greenhouse gases, nor authorized DEC specifically to regulate emissions of CO2 by electric generating plants. The New York Legislature has not authorized or set as state policy the RGGI Model Rule as implemented by DEC. The New York Legislature has not authorized DEC to issue greenhouse gas allowances, and has not authorized DEC to issue all such allowances to NYSERDA, for sale in a centralized auction. The New York State Legislature has not authorized NYSERDA to sell greenhouse gas allowances, has not authorized NYSERDA to sell allowances in an auction, and has not authorized NYSERDA’s receipt of auction revenues. The New York Legislature has not authorized the distribution of proceeds of the sale of allowances by NYSERDA, and the New York Legislature has not appropriated or otherwise established a policy for the use of funds received by the State of New York as a result of the sale of allowances. The New York Legislature has not authorized the participation of any state administrative agency in the implementation of the RGGI program, including but not limited to specifically the issuance and sale of allowances, and the receipt and use of the proceeds from the sale of allowances. In fact, the only greenhouse gas legislation passed by the New York State Legislature—a bill to fund an environmental task force to review greenhouse gas policies—was vetoed in January of 2007. Then Governor Spitzer issued the veto, which subsequently has not been overridden by the New York Legislature.

As part of its promulgation of the RGGI rules, DEC stated that the program is expressly premised on the assumption that electrical generation sources will include the cost they incur to acquire allowances in the rates charged for electricity they generate. In general, for the unit producing the marginal supply, the cost to produce electricity will increase by the cost of allowances. As a result of the operation of a market process conducted by the New York Independent System Operator (“NYISO”), this increased cost will be reflected in the price received by virtually all generators, allowing them an opportunity to recover the cost of allowances. Indeed, generators who do not need allowances (e.g., nuclear or hydro-electric generators), and generators located outside of the RGGI area who are not bound by RGGI but who bid to serve the New York market, simply as a function of the NYISO market process, will see their revenues and gross profits rise by an amount equal to the cost of the allowances, even though they will not bear that cost.
Perhaps it is time for the legislature to consider the RGGI program and if it is to be authorized, how the funds from the sale of allowances to emit CO2 are best used in the public interest for the people of the state during these times of economic distress.

The legislature might also consider whether
  • the unproven and expensive RGGI approach, which has failed thus far in Europe, should be adopted;
  • whether a regional rather than national approach to CO2 emissions disadvantages New York's economy;
  • whether it makes sense to focus only on electric utilities and not on other CO2 emitting sources, such as automobiles, trucks, and industry;
  • whether the RGGI "market-based" alternative to a carbon tax creates undeserved financial windfalls for nuclear, hydro, and wind power producers;
  • whether, if the program is approved, the revenues should be used to alleviate the energy burdens of low-income New Yorkers, more than 300,000 of whom had their service shut off last year because of unpaid utility bills.
Governor Martin O'Malley of Maryland, in his state of the state message, noted that Maryland is using some of its RGGI allowance sale revenue to help reduce rates low income consumers pay for their electricity:
Maryland participated in two RGGI auctions last year and because of these efforts we are able to invest $34.3 million in programs to promote cleaner energy sources, energy efficiency and conservation, and provide rate relief for low and moderate income households-all of which will go a long way to fight climate change and lower our electricity bills.
In contrast, PULP was rebuffed in its request to NYSERDA that RGGI revenues be targeted to help reduce energy bills of New York's low income customers. See PULP Urges NYSERDA to Use RGGI Auction Revenue to Support Low Income Energy Efficiency Programs. Cerainly the Maryland approach to help low and moderate income customers would be a better use of NYSERDA funds than its grants to landlords to submeter apartment buildings, unhooking them from the incentive to improve energy efficiency of buildings, and enabling them to displace low-income tenants unable to pay the bills. See PSC and NYSERDA Spend Millions for Submetering Projects Violating Residential Tenants’ Rights.

Large industrial customers recently asked the PSC to reduce surcharges for the System Benefit Charge by the amount of RGGI revenue to be received by NYSERDA. See PSC Asked to Offset its $330M Efficiency Surcharges with $220M from Sale of Greenhouse Gas Allowances.

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