Court Seeks Comment on Proposal to Use Con Ed Customer Money and RGGI Funds to Settle Lawsuit Claiming RGGI "Cap and Trade" Scheme is Illegal

Background
As we previously reported, the RGGI "cap and trade" program run by New York State agencies without enabling legislation was challenged in court by a power generator with a fixed long term contract that could not be adjusted to add the new cost of buying RGGI carbon allowances. See Millions of RGGI "Cap and Trade" Auction Proceeds Unspent Due to Legal Challenge, PULP Network, June 22, 2009.

The complaint in the lawsuit questions legality of the new duty of owners of fossil fueled power plants to buy RGGI allowances that was imposed administratively, without any legislative enabling authority. The plaintiffs allege the money from the sale of RGGI carbon allowances will unlawfully "be disbursed by NYSERDA at its unfettered discretion, with no authorization or appropriation by the New York Legislature."

Now there is a proposal to settle the dispute over whether the RGGI "cap and trade" program is legal by paying off the plaintiffs with free allowances.

This is an unseemly bargain.

Either the costly RGGI scheme is legal and the plaintiffs should not get a dime's worth of free allowances, or the scheme is unlawful and RGGI proponents should be required to seek legislative authority to regularize it and direct the allocation of the hundreds of millions of dollars it generates.

According to a DEC Press release,

Although not mandated by law to do so, the state is soliciting public comment on the settlement document. Public comments will be collected by the Attorney General's office, reviewed, and summarized for the court as part of the court approval process. If public comments reveal issues that necessitate revision of the settlement, the parties will discuss revising the Consent Decree accordingly. We expect that the 30-day comment period will commence on 12/30/09, the day that the proposed settlement is published in the Environmental Notice Bulletin

Proposed Settlement of the Challenge to Legality of RGGI with Con Ed Ratepayer and Questioned RGGI Revenues
The case will be settled later this month if a proposed Consent Decreee is approved by Judge Thomas J. McNamara of Supreme Court, Albany County. The proposed settlement

• Makes a $7.7 million payoff to the power producers, laundered through Con Edison, by having Con Edison buy RGGI allowances reserved for them by DEC, and then giving the allowances free to the plaintiffs,
  
• It maintains the appearance that state is not giving away the allowances free,
  
• It maintains the appearance that RGGI money from the questioned scheme is not directly used to pay for the allowances given to the plaintiffs as consideration for their dropping the case,
  
• Con Edison collects the $7.7 million cost it incurs for the giveaway allowances from its customers,
  
• NYSERDA gives an equivalent grant of RGGI funds to Con Edison, which ostensibly will benefit Con Ed customers in the future and offset the higher rates they must pay to underwrite the deal. The additional NYSERDA grant of RGGI money would be spent by Con Edison on trendy-sounding, unspecified "smart grid" projects that apparently are not otherwise being done now and are not cost effective enough to warrant investment in them today without subsidy
• As a result, a portion of the funds whose legality is questioned is used to settle the case.
  

According to the press release issued by the state agencies, the proposed settlement will not add to the costs being passed through to customers to pay the higher energy prices caused by adding the cost of RGGI allowances, and public comment is invited on the terms of the settlement:

The settlement is designed to be ratepayer neutral. For every dollar spent by Con Edison to purchase allowances, NYSERDA will match those dollars for investments by Con Edison in Smart Grid technologies and/or other system infrastructure improvements. These investments of approximately $2.6 million per year from 2009 through 2011 will offset any costs to customers.
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Although not mandated by law to do so, the state is soliciting public comment on the settlement document. Public comments will be collected by the Attorney General's office, reviewed, and summarized for the court as part of the court approval process. If public comments reveal issues that necessitate revision of the settlement, the parties will discuss revising the Consent Decree accordingly. We expect that the 30-day comment period will commence on 12/30/09, the day that the proposed settlement is published in the Environmental Notice Bulletin

Statement on the Settlement of the Regional Greenhouse Gas Initiative Lawsuit
Joint Statement by New York State Energy Research and Development Authority President and CEO Francis J. Murray, New York State Department of Environmental Conservation Commissioner Pete Grannis, and New York State Public Service Commission Chairman Garry Brown, Media Newswire, Nov. 28, 2009.

Con Edison's Role
The role of Con Edison in laundering the payoff to the power producers is outlined in more detail in the notice of the proposed consent decree that would stop the court challenge to legality of RGGI. It indicates that the PSC will allow Con Edison to pass through to its customers -- through higher rates -- its cost of the payoff (buying RGGI allowances for the power producers), which is estimated at $2.6 million per year through 2014, or $7.7 million:

The parties to the Consent Decree include Governor Paterson, DEC, NYSERDA, PSC and Indeck, as well as Con Edison, BNYCP, Selkirk, and the Department of Public Service (DPS). Under the Consent Decree, Con Edison has agreed to pay the cost of the additional allowances that Indeck and Selkirk will need through the end of their LTCs in or before 2015 to cover their emissions over and above the pro rata allocation of allowances by DEC from the LTC set-aside under the DEC Rule. Con Edison also has agreed to cover the cost of such shortfall in necessary allowances that BNYCP is likely to experience through 2016, when DEC projects that the number of allowances in the LTC set-aside account will be sufficient to cover BNYCP’s allowance needs. DEC has committed in the Consent Decree to maintain the LTC set-aside account under the DEC Rule at 1.5 million allowances annually through 2016. The PSC has agreed to consider approval of a tariff amendment allowing Con Edison to pass through the costs of purchasing allowances to its ratepayers. Based on currently available information, the parties estimate the cost of these allowances will be approximately $2.6 million/year. To offset these costs, NYSERDA has agreed in the Consent Decree to use a portion of the RGGI proceeds to fund energy efficiency programs in Con Edison’s rate territory, which such funds will be commensurate with the costs associated with Con Edison’s payment of allowance costs to Indeck, BNYCP and Selkirk.

In other words, the proposed settlement contemplates Con Ed buying RGGI allowances, giving them to the plaintiffs, using money from Con Ed customers to reimburse its estimated $7.7 million cost of buying allowances for the plaintiffs, and using RGGI money from NYSERDA for unspecified new Con Ed investments that are claimed to vaguely benefit its customers.

Basically, a small amount from the hundreds of millions of dollars of proceeds of the alleged illegal RGGI scheme would be used to end the litigation by paying off the plaintiffs.

It is claimed that the added cost passed through to customers with higher Con Ed rates would be offset by a new grant to Con Ed from NYSERDA in an amount equivalent to the rate increase. However, it is not clear that Con Ed would otherwise need such a grant, what it is for, and whether the projects it would fund benefit customers or are cost effective. See AARP Opposes PEPCO Plan for Spending on "Smart Meters", PULP Network, June 19, 2009; Rebecca Smith, Smart Meter, Dumb Idea?, Wall Street Journal, April 27, 2009; Consumer Uprising Against California Smart Meter Program, PULP Network, October 28, 2009; Will "Smart" Meters Pass The Test of Time?, PULP Network, Nov. 24, 2009; Niagara Mohawk dba National Grid Seeks Continued Secrecy on Cost of Its "Smart Grid" Proposals, PULP Network, November 25, 2009

"Cap and Trade"
The "cap and trade" schemes to reduce carbon emissions, such as the RGGI program, are a favorite of deregulation advocates who tout "market solutions" to concerns about global warming. While some environmental groups - and former Vice President Gore - have now embraced "cap and trade" as a "second best" alternative, support for carbon allowance trading schemes is far from universal. Some critics in the environmental, scientific and economics professions point out that it may be very costly and ineffective.

"Cap-and-trade is a pretty lousy idea," says Paul Falkowski, Ph.D., director of Rutgers University's Energy Institute. "It doesn't reduce emissions in the near term, and we have to reduce, not just keep emissions steady. If we put a cap on and start trading, we'll slowly get off a carbon diet, but it's not going to be a steep curve, and it's going to be painful."

Falkowski, who researches the carbon cycle — the uptake and release of carbon — in the oceans, is one of many scientists who view cap-and-trade, the creation of a market for carbon-based substances, as an impractical solution to climate change.

Karina Schäfer, Ph.D., a Rutgers ecosystem ecologist, is similarly skeptical about a carbon market: "Cap-and-trade will be the next bubble. We've seen how unstable the financial and housing markets are - we've watched them increase and crash. Do we want to have the earth's climate rely on those instruments?"

"I favor a simple carbon tax," said Falkowski. "It costs ‘x' amount of money to put ‘x' amount of carbon in the atmosphere, and everybody pays that cost. We know the sources of oil everywhere in the world and how much oil is put on the market every day-futures trading is based on it. We know most of sources of coal and every major supplier of natural gas. We can tax the suppliers."

New Jersey scientists oppose cap-and-trade, support carbon tax, newjerseynewsroom.com, Dec. 24, 2009.

Advocates of cap and trade schemes have not yet convinced federal or New York legislators to adopt them.

Perhaps this is a reason why Governor Pataki used state agencies and NYSERDA to implement the RGGI scheme in New York without enabling legislation, unlike all the other states that joined in the RGGI program, whose legislatures approved it, and, importantly, gave direction on how to use the large stream of new revenue it created.

In New York, there is no legislative control over how NYSERDA uses RGGI money. After the lawsuit was brought, NYSERDA did not spend the money. See Millions of RGGI "Cap and Trade" Auction Proceeds Unspent Due to Legal Challenge, PULP Network, June 22, 2009. Although some of it ($90 million) was swept into the general budget last year, the bulk of it remains to be spent by NYSERDA, and more money flows in regularly with each auction of RGGI allowances required to be purchased by DEC.

RGGI Impacts on Prices Paid by Customers
Another problem with cap and trade programs that they add more cost burdens to consumers. Wholesale power producers who must buy the allowances (i.e., those who burn natural gas, oil or coal) add the cost to their prices. That is what brought on the lawsuit, because some producers had long term contracts that did not allow for upward adjustment to take account of the new cost of RGGI allowances. Retail utilities like Con Edison buy wholesale power at the higher prices and pass that through to consumers.

The true cost of the RGGI program is usually understated, because the cost estimates are based on what power producers pay for the first purchase of carbon allowances at state agency auctions.

Because fossil fueled power plants typically set clearing prices in NYISO spot markets, and those markets set the same price for all sellers, the price for power produced by all, including non fossil providers -- nuclear, water, wind -- is also increased. The revenue from the increase in their prices due to the effect of adding RGGI allowance costs to the price set by fossil fuel providers is a windfall to the non fossil producers. As stated in the complaint in Indeck Corinth, L.P. v. Paterson

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.

Also, cost estimates for RGGI do not take into account the reality that sellers will use the price for allowances set in secondary allowance markets when that price is higher than the allowances they bought at the state auction, allowing them to take of "scarcity pricing" and "opportunity costs" to raise their prices further (or more darkly, benefitting from market gaming in the de facto deregulated secondary allowance markets). See "Cap and Trade" Market System for CO2 Reduction Likely to Raise New York Electricity Prices, PULP Network, May 20, 2009; CO2 Cap and Trade Programs Inflate Electric Rates in Restructured States, PULP Network, March 13, 2009.

Finally, because the RGGI program only involves ten states, the higher costs imposed on New York power producers may actually encourage more importation of "dirtier" energy from neighboring areas where producers do not pay for carbon allowances, such as Pennsylvania, which did not join RGGI.

Uses of "Cap and Trade Revenue"
One of the hot legislative issues in Congress now as it considers climate change legislation is what to do with the revenue received in a "cap and trade" system when the government auctions off carbon allowances. Because of the adverse rate impacts, low income consumer advocates urge that "cap and trade" program revenues be used to reduce the electric bills of low income people by bolstering the LIHEAP program and funding low income weatherization grant programs. The Center on Budget and Policy Priorities has embraced "cap and trade" when it is coupled with measures to protect consumers. See Testimony of Robert Greenstein on the potential use of revenues from allowance sales to reduce low income customer energy burdens.

Governor Martin O'Malley of Maryland, in his 2009 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.

When RGGI was first getting off the ground, PULP urged NYSERDA to target a very substantial part of the revenue it receives from RGGI allowances to benefit low income customers, whose energy cost burdens are worsened by the RGGI program. See PULP Urges NYSERDA to Use RGGI Auction Revenue to Support Low Income Energy Efficiency Programs, PULP Network, January 7, 2008.

PULP's recommendation was rebuffed, and the money is to be allocated by NYSERDA with no clear legislative guidelines for its use.

In December 2009, the New York legislature swept some of the RGGI money held by NYSERDA into the general fund, as part of a deficit reduction plan, but the legislature still has never authorized the state agencies to create and run the RGGI cap and trade scheme. If the legislature had authorized RGGI, there would have been no need now to propose paying off the power producers who challenge it.

Meanwhile, the cost of the RGGI program adds to the burdens of New York's electricity consumers, especially the poor and those who live on fixed incomes. See Wages of 30% of New Yorkers Do Not Cover Minimum Needs, June 13, 2008. More than 300,000 utility customers in New York lost service last year because they could not afford their bills. See PSC Reports on Devastating Termination Statistics, PULP Network, April 09, 2009. In the first 11 months of 2009, Con Edison shut off service to 105,338 customers for nonpayment of their high and spiking bills. Adding hundreds of millions of dollars of new financial burdens for electricity consumers with the RGGI program, without addressing the impact on the poor, was an insult.

The proposed consent decree, if approved by the court, would allow the RGGI program to go forward without adequate legislative control of its cost, without legislative oversight of the disposition of large amounts of revenue, and without judicial review of its legality.

During the comment period on the proposed Consent Decree, which runs until January 29, 2010 the agreement may be examined on the DEC’s website (www.dec.ny.gov), on NYSERDA’s website (www.nyserda.org), and on the NYOAG’s website (www.ag.ny.gov/bureaus/environmental/legal_documents.html).