by Roger Feldman -- Bingham, Dana and Gould, P.C.
Wars among energy providers have been fought in air quality environmental guises for decades: Natural gas against coal; Nuclear against fossil; Eastern coal against Western coal. Comes now the millennium: In the age of open access and humming wires, sound economy not fuels choices, environmental externalities will drive the profile of the power business. Think again: The "air wars" between lower priced Midwestern and higher priced Eastern power has commenced. As with all of the earlier wars, the result is certainly in doubt and frequently likely to be steeped in tortured compromise.
The charges against Midwestern power are of two related types. First, that open access will lead to increased air pollution transport from Midwest powerplants market-induced to pump more power (and hence more pollution) eastward. The result: ozone nonattainment exacerbation in the Northeast and in the Mid-Atlantic States, because, as a Republican Congressman from new Jersey has charged, the Clean Air Act does not apply equally to restrict pollution by all utilities in all regions of the country, because it contains so many grandfathering loopholes. Second, that utility companies operating in the Northeast Ozone Transport Region (OTR) will suffer competitive disadvantages if transported ozone and ozone precursors (nitrogen oxides and volatile organic compounds) from states outside the OTR negate their pollution control efforts.
Three different types of responses already have been formulated to these allegations, which have been presented by an intriguingly unusual combination of higher power priced Eastern utilities and environmentalists, who have discerned their common interests.
The first, from utility industry restructuring major general Republican Thomas Bliley (Va.), is to brand the pollution transport charge a "red herring." After all, Midwestern utilities must comply with the same Clean Air Act as Eastern utilities. Moreover, competition will lower
prices, improve productivity and repeal the "monopoly tax" resulting from regulations.
The second, from the Midwestern utilities, is an argument of a different hue. A "green smokescreen" is what AEP Executive Vice President Lloth recently accused his Northeast utility brethren of hiding behind. His concern extends to alarm at the counterattack which he perceives to have been launched by EPA through its announcement of an advanced rulemaking notice of new NOx-reduction requirements for electric utilities. Presumably these would have the effect of upping Midwest power generation costs (or, "leveling the playing field", as the Eastern utilities would have it). Congressman Bliley has rattled his saber at EPAs initiative, stating that Congress will expect the agency, which is within its purview, to justify the cost of the new regulation according to its risk.
A more balanced approach has been suggested by the President of GPU - - an Eastern utility in favor of restructuring (as long as it is accompanied by a non-bypassable transition charge). The basis for his argument is the fact that scientific assessment of ozone transport is still incomplete. He favors a program of incremental steps toward achieving ozone attainment while the scientific assessments are being completed.
A recently published article by the Director of Harvard Kennedy Schools Environmental and Natural Resources Center, highlights the ambiguities of the issue. It points out that the Northeast will only face undesirable environmental impacts of NOx if it relies on the Midwest not just for short term energy supply, while it is capacity short, but for capacity to meet incremental demand. It points out that the relationship between NOx emissions and ozone production is still the subject of research. It also points out that until transmission access issues are resolved, speculation as to the extent of transmission of Midwestern power to the East necessarily is speculative. Finally the article acknowledges that early nuclear plant retirement could exacerbate environmental problems in the Northeast by increasing reliance on Midwest fossil generation. Its recommendation: The creation of a tradable permit program within the Ozone Transport Assessment Group (OTAG) (which includes representatives of the 37 Eastern states). Given the number of caveats, the efficacy of this recommendation at least is problematic.
Power privateers beware: The force that through the green haze surges, may surge at thee. It may impair the competitiveness of generating assets acquired from restructuring utilities. On the other hand, properly responded to, concern for local air quality could lead to state regulatory encouragement for new, more efficient merchant capacity, and correlative renewed enthusiasm for open access as a greenworthy activity.
Look up in the ozone, your future is in the air wars.
ROGER FELDMAN, Co-Chair of Andrews Kurth LLP Climate Change and Carbon Markets Group has practiced law related to the finance of environmental and energy projects and companies for 40 years. In particular, he has analyzed and executed a wide variety and substantial value of project financings. He chairs the American Bar Association’s Committee on Carbon Trading and Finance, serves on the Board of the American Council for Renewable Energy, and has been a senior official in the Federal Energy Administration. He is a graduate of Brown University, Yale Law School and Harvard Business School.