Legal Nightmares

Legal Nightmares

by Gary M. Stern

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Utilities are facing major issues such as raising capital, increasing the use of renewable energy and energy efficiency, and dealing with a changing political environment.

The biggest of them all, though, are climate change and the expected carbon dioxide emission controls. Just as important is the renewed emphasis on restricting noxious fumes from coal-fired power plants. All these matters have leapt to the forefront of the legal and regulatory landscape in the utility field.

"Global warming legislation and how that rolls out impacts my customers the most," says Mike Morris, chief executive of American Electric Power. Much of AEP's political efforts revolve around informing legislators of the "potential ramifications of doing this global warming legislation wrong versus doing it with logic and understanding of what it means to the U.S. economy." Morris would like to see more research performed on capturing carbon emissions before a law is passed. He added that AEP has been developing and researching technologies that "step up to scale to capture carbon."

Combating rising costs is another major concern. Utilities are asking regulators to hike prices while customers are facing stagnant salaries and heightened costs of their own. "Households are hit with higher gas prices, but coal and natural gas prices have escalated," Morris said. Hence utilities need to increase electricity prices "to recover the cost of fuel and continue to enhance the infrastructure."

Echoing those views, Mike Chesser, CEO of Kansas City Power & Light, said the regulatory issue on his agenda "is gaining some certainty around carbon emissions." He connects CO2 emission uncertainty with the rising cost of electricity. If the government imposes CO2 emission controls on utilities too quickly, "it would have a big impact on the price of electricity because of the disproportionate costs of containing carbon."

Taking a proactive stance on CO2 emissions is the most effective way for a utility to proceed. For example, when KCP&L was planning its Iatan 2 coal-fired plant in Weston, Mo., it convened business representatives, environmentalists, members of low-income groups and legislators to create a plan using energy efficiencies and renewables to reduce CO2 emissions from the existing Iatan plant.

Chesser said the result of the strategy would be that "the combined emissions from both plants will be lower than the current emissions from Iatan 1" because of the extensive retrofitting to capture carbon emissions, paying customers incentives to retrofit lighting and air conditioning, and building wind towers. All groups signed that agreement except the Sierra Club, which fought the building of the coal-fired plant in court. Undeterred, KCP&L sought out the Sierra Club several years later, met with the organization and agreed to greenhouse gas concessions as well as build 700 megawatts of green energy.

Political Winds

At Pacific Gas and Electric in California, reaching the 20 percent renewable goal, which California set by 2010, is the company's main goal, explained Steven Kline, vice president of corporate environmental and federal affairs. Hence, PG&E has been focused on assuring that its renewable energy suppliers are able to deliver their goods to meet contractual arrangements.

As of 2007, renewables at PG&E already supplied 12 percent of the utility's power, encompassing solar, wind, tidal and wave power. In addition, PG&E signed contracts for two utility-scale photovoltaic solar power projects totaling 800 megawatts of energy, which will serve 239,000 residential homes annually. If and when carbon emission restrictions are introduced, Kline expects that it will contribute to driving down prices of renewables. "Our goal is reducing our greenhouse gas emissions."

Jim Owen, the media relations director of the Edison Electric Institute, the largest trade association of investor-owned electric utilities, added that nearly every regulatory and legal issue including renewables, energy efficiency and establishing new technologies all boil down to the same issue: climate change. Many of the largest investor-owned utilities are focused on energy efficiency and establishing more "commercial-scale clean coal and taking pollutants like CO2 out of the coal," Owen said. In fact, coal produces about 50 percent of the electricity created by EEI members and electric utilities cause about one third of the CO2 emissions in the United States.

Members of the Arlington, Va.-based National Rural Electric Cooperative Association are taking proactive steps to deal with its number one regulatory issue -- again -- climate change, noted Kirk Johnson, the association's vice president of environmental policy. Because 80 percent of the power generated by NRECA members stems from coal and only about 9 percent from natural gas, any restrictions on CO2 emissions could alter the business model of its members and their ability to provide power to their customers.

Johnson noted that NRECA studies project that the electricity needs of its members are expected to rise 30 percent in the next two decades. Combine that spike in demand with the expected mandate to reduce CO2 emissions and Johnson said, "You create a potential mess. Hence we need to find ways to generate the power and create energy efficiencies."

Regarding climate issues, American Public Power Association members are meeting the increasing demand for power by building a wide range of new plants fueled by coal, natural gas, nuclear and hydro. "You need a balanced approach, but you can't cut off the most dominant fuel we have. 'Lips that touch coal will never touch mine' isn't viable," said Sue Kelly, its general counsel and vice president of policy analysis.

Bottom-line on the regulatory horizon: Most utilities are reducing CO2 emissions before any demands are imposed on them. They sense some critical changes are in the wind and they want to get ahead of the curve.