REGIONAL GREENHOUSE GAS INITIATIVE A Contrarian Perspective Peter Glaser American Bar Association Environment, Energy & Resources Section Thursday, January 26, 2006

CAVEAT The Views Expressed Here Reflect Only Those of the Author, Not an Entity Participating in the RGGI Process

RGGI ISSUES RGGI as Part of a State Regulatory and Litigation Strategy to Leverage Congressional Action Promoting More Natural Gas Generation at a Time of Over-Reliance on Gas Programmatic Issues Legal Issues

RGGI as Part of a State Regulatory and Litigation Strategy to Leverage Congressional Action Frustration with Congress’ continuing decision not to enact mandatory GHG control program have led some states to: - attempt to force GHG regulation through litigation - attempt to force GHG regulation through state regulation

GHG Litigation Led by State AGs D.C. Circuit: Can EPA Be Compelled to Regulate GHG Emissions under Existing Clean Air Act Authority? - D.C. Cir. says no (Mass. v. EPA, No (D.C. Cir. July 15, 2005)) – Supreme Court next - 2d Circuit: Do GHG Emissions from Powerplants in Twenty States Create a Common Law Public Nuisance Actionable in New York? - SDNY says no (Conn. V. American Electric Power Co., No. 04Civ.5669 SDNY Sept. 16, 2005) – now on appeal

State Regulation in Addition to RGGI CA - $8/ton carbon adder in utility resource acquisitions. CEC adopts policy that GHG emissions from long-term fossil fuel resources cannot exceed those of a new CCGT; CPUC adopts similar policy and directs staff to draft proposed implementing regulations. WA and OR indicate they may follow CA. Western Governors Association looks at whether GHG emissions profile should be part of its definition of “clean energy resources.” MA, CT, OR each regulate CO 2 emissions from powerplants. New Mexico recently became the first significant coal producing state to adopt GHG reduction targets: 2000 levels by 2010, 10% below 2000 levels by 2020, and 75% below 2000 levels by North Carolina – legislation to study potential GHG regulation.

RGGI AS SYMBOLISM 121 MMTPY Cap, reduced by 10% by 2018, yields 12 MMTPY in CO2 emissions reductions plus otherwise expected emissions growth. Compares to 7716 MMTPY global CO2 emissions. Zero impact on possible global climate change. “Leakage” – coal-based generation may be displaced outside the region and imported into the region – potentially offsetting some or all of in-region emission reductions. Commitment to monitor leakage, but legal issues in attempting to establish “carbon content” limitations on electricity imports.

Northeast Overly Reliant on Gas “Taken together, the results of the installed and operable capacity analysis demonstrate that New England will likely face an increased risk of operating with less capacity than needed by The results also show that the region will not have sufficient capacity to meet the IC requirements in the 2008 to 2010 timeframe, depending on load growth, weather conditions, generator performance and attrition, and the conditions in specific load pockets, such as Connecticut. Because the timeframe for building new generation resources is about two to four years, the analysis highlights the urgent need for new generating resources in New England.” - ISO New England, Regional System Plan 2005, October 20, 2005, p. ES-9 (Emphasis in original).

“ISO’s operating experience and RSP05 highlight a high level of vulnerability in gas and oil prices and the potential for fuel disruptions in that gas and oil fuel plants provide almost two-thirds of the system’s capacity…These concerns are associated with a natural gas shortage that could occur during a winter cold snap and a resulting regional gas shortage…Since approximately 50% of New England’s generating capacity is capable of being fueled with natural gas, and gas actually fuels 40% of the region’s electrical energy generation, the region must focus on developing greater fuel diversity for its electric supply for the long-term.” - ISO New England, Regional System Plan 2005, October 20, 2005, p. ES-9 to ES-10.

“New England Preps for Winter of High Electricity Demand, Uncertain Fuel Supply” “Natural gas fires some 40 percent of the region’s power plants, up from 17 percent just six years ago. On extremely cold winter days, when demand for natural gas surges across New England, plants that lack firm supply contracts for natural gas might become unavailable. Meanwhile ISO New England predicts that, even with normal weather, the region’s demand for electricity this winter could reach approximately 22,830 megawatts (MW), surpassing the previous winter record of 22,818 MW established during the Cold Snap of January If extreme weather conditions occur this winter season, there is a 10 percent chance that New England’s winter electricity use could reach 23,740 MW.” -ISO New England Outlook, January 2006.

RGGI INCREASES GAS USE Total RGGI Region NET CH CCCT (GWh)93,829186, ,979 GAS USE (Tbtu) 696 1, COAL(Gwh)66,503 63, COAL USE (Tbtu) Renewables (Gwh)5,17732,922+27,745 Source: RGGI Modeling (9/14/05 “Reference Case”)

Cost Concerns Lead MA and RI to Say No – MA 18% of RGGI CO2 Emissions Budget "We're seeing huge rate increases now in the cost of energy," Governor Romney said in a telephone interview yesterday. "To add to that burden for the purposes of symbolism is something our business community is not about to undertake." -New York Times, November 29, 2005

COST CONCERN Regional CO2 Cap Is Not Like a National Pollutant Trading Program - No way to control CO2 emissions other than to close plants or ramp back production - Limited number of states participating – NY and NJ have almost ¾ of RGGI CO2 emissions cap - Lack of liquidity undermines market concept

Programmatic Issues RGGI Modeling Allowance Allocation Offsets Lack of Cap on Allowance Price

RGGI Modeling Reference Case – Optimistic Assumptions gas prices of $4.89 in 2003 dollars - No new coal plants in-region - States meet aggressive RPS Requirements High Emissions Case -$7 gas -New coal plants allowed -States meet aggressive RPS Requirements Very High Emissions Case -$11 gas -New coal plants allowed -States fall 50% short on RPS Requirements

RGGI Modeling – Generation Mix

RGGI Modeling – Capacity Additions

RGGI Modeling

Other Modeling Issues Modeling assumes load growth of less than 1% per year, although historical load growth is more than 2% in most years, and in some regions (New England) has averaged over 3% per year. Unrealistically low load growth results in lower projected carbon emissions, lower new generation build needs, less consequences of assumed retirements, and artificially reduces the predicted cost of the program Model adds more than 6000 MW of dependable renewables into the RGGI region. Unrealistic. Despite RPS requirements, actual renewables built has been limited for various reasons, including consumer price concerns and siting difficulties Model assumes increases in nuclear power, despite relicensing issues

Allowance Allocation States are assigned allowance budgets. In allocating allowances to in-state entities: - 25% must be reserved for consumer benefit or strategic energy purpose - Complete state discretion to allocate balance – could do auction Existing generators will not have sufficient allowances to generate even at the restricted cap levels. Will have to buy allowances to generate to match at least 25% of their capped emissions, and perhaps to meet all of their capped emissions. This will increase the price of electricity in the region and raises reliability issues. Federal cap and trade programs allocate allowances to generators.

Severely Limited Use of Offsets Source may cover only 3.3% of its allowance needs through use of offsets. Value of offset cut in half if carbon reduction project not done in RGGI region. In any event, project must be done domestically. If allowance prices exceed $7, one full credit for any domestic carbon reduction, and offsets may increase to 5% of source’s allowances. If allowance price exceeds $10 twice in two consecutive 12-month periods, full credit for any offset project domestically or internationally, and offsets may increase to 5% for first three years of compliance period and 20% for balance of compliance period. Limited availability of offsets severely restricts liquidity of program. Without closing coal plants, from where are the allowances supposed to come?

LACK OF CAP ON ALLOWANCE PRICE Hard Cap: Price could never be more than $x/ton. Circuit Breaker: Delay reduction in cap if allowance price exceeds $x/ton. Widely urged by industry.

Legal Issues State Issues: - Can states adopt RGGI rule without new legislation? State DEQs generally have pre-existing power to regulate “air pollutants” or “air contaminants.” Does this include CO2? Federal issues: -Can states impose significant restraints on the interstate electricity industry for purely symbolic purposes? -Can a group of states establish an interstate emissions credit program without Congressional approval? -Does the operation of a program with significant effects on interstate electric markets raise preemption issues? -Is RGGI preempted by federal CO2 policy?