By Rich Heidorn Jr.

WASHINGTON — Senior Environmental Protection Agency officials promised energy regulators and utility executives last week that the final carbon emission rule the agency issues this summer will protect reliability and not crush consumers.

But the message, delivered at the winter meetings of the National Association of Utility Regulatory Commissioners and a Federal Energy Regulatory Commission technical conference, left many in attendance skeptical. While officials said they will make changes to address concerns raised over the proposed rule issued last June, they offered few details.

EPA Administrator Gina McCarthy told a NARUC general session Tuesday that the agency has been taking critiques of the Clean Power Plan to heart. Referencing prior EPA rulemakings, McCarthy said “each and every time, we learned from the comment period.”

McCarthy acknowledged the frustration state and industry officials have expressed over the lack of certainty in the proposed rule, which seeks to reduce power plant emissions 30% by 2030. “We’ll try to be a lot more specific in the final rule so states can design their [compliance] plans with the certainty they’re looking for,” she said.

Later that day, Janet McCabe, acting assistant administrator for EPA’s Office of Air and Radiation, appeared on a NARUC panel discussion with FERC Commissioner Philip Moeller. McCabe and Moeller spoke after listening to utility regulators from states both supportive of the plan (California and Maryland) and those highly critical of it (Wisconsin, Wyoming, Arkansas and Texas).

McCabe also was the leadoff witness at FERC’s day-long technical conference on the reliability impacts of the plan Thursday.

The topics at the two forums included the “early cliff” of 2020 targets; states’ willingness to embrace regional and market compliance methods; how to craft a “reliability safety valve;” and the limitations of Order 1000.

In addition to McCabe, FERC heard from more than two dozen state regulators and industry and RTO officials — and about 10 protestors. The demonstrators, wearing red T-shirts and carrying signs, broke several times into chants of “Gas is dirty, wind and solar now,” before being escorted out by security.

McCabe Vague on Alternatives to Building Blocks

Many critics have challenged the assumptions in EPA’s four “building blocks” for achieving compliance: heat rate improvements, more natural gas generation, nuclear and renewables, and energy efficiency.

McCabe attempted to reassure FERC that there will be other ways to achieve EPA’s targets beyond the four spelled out in the agency’s proposed rule.

“A lot of attention has been zeroing on the four building blocks, and why they pose challenges and why EPA didn’t get that quite right,” McCabe said. “I think it’s important not to forget that there’s a range of other activities that states and utilities can engage in that will lead to reduced carbon.”

But, pressed by Moeller for details, the command she had displayed in reading a prepared statement was replaced with halting, vague sentences.

“A lot of the stakeholders and people in the industry are having good discussions about this. There are other ways to improve the efficiency of the system. One that’s been mentioned a number of times is transmission efficiencies and working on those areas …” she responded. “One of the significant uses of power in municipalities is water and wastewater. So efforts to be more efficient there can reduce the amount of power that’s needed. So we think there are a variety of things that can be done.”

Thursday’s “national overview” session was the first of four scheduled technical conferences on the EPA proposal’s impact on reliability and wholesale electricity markets.

FERC announced the conferences in response to a request from three Republican lawmakers, including Alaska Sen. Lisa Murkowski, chairman of the Energy and Natural Resources Committee. The Republicans said in a letter to FERC that EPA “lacks the mission and the expertise to determine what is necessary to maintain the reliability of the nation’s electric grid.”

Additional sessions are scheduled for Feb. 25 in Denver, March 11 in D.C. and March 31 in St. Louis (AD15-4).

The day-long technical conference included discussions on numerous aspects of EPA’s carbon emission rule. Below is a summary of several of them, along with links to the witnesses’ written testimony.

Downbeat Moeller Says Only 2 of 4 Building Blocks Work

Moeller on Thursday offered his harshest critique yet of EPA’s proposed carbon emission rule, saying that only two of the plan’s four “building blocks” are viable.

Moeller told the FERC technical conference that building block 1’s call for average heat rate improvements of 6% for coal steam electric generators is unrealistic and that states will be reluctant to adopt building block 4, which calls for improving demand-side energy efficiency to 1.5% annually, because of questions about how states will enforce such goals.

Building blocks 2 and 3 — dispatching natural gas combined-cycle units to up to a 70% capacity factor, and use of more zero- and low-emitting power sources — are also fraught with challenges, Moeller said.

“In the Midwest there’s already a lot of wind and a lot of transmission access. Can there be a lot more? Well, yeah, but basically the Midwest has got to get through to building block 2,” he told reporters during a break in the hearing.

“To go from what is a 24 to 28% capacity factor … now to something approaching 70[%] — I don’t see how the math lines up for peak demand for pipeline capacity in an area of the country that gets very, very cold. Is it doable? I hope so. But you go back to the fundamental problem I’ve been raising.”

That problem: finding new ways to fund pipeline expansions. While previous expansions have been backed by long-term contracts with local distribution companies, “the new customer base is power plants and the day-two market and they’re not likely to sign long-term firm contracts,” Moeller said. “So how do we get the financing for these new pipes?”

At the NARUC meetings, regulators from Wisconsin, Wyoming and Texas expressed similar concerns, with Wyoming Public Service Commission Chairman Alan Minier saying that none of the four methods would work for his state.

Regulators: ‘Bake in’ Reliability Safety Valve to Rule

Backers of a “reliability safety valve” said it should be explicitly included in the EPA rule to ensure it survives legal challenges.

FERC Chairman Cheryl LaFleur said she was aware of about four proposals, the most detailed of which she said was that of the ISO/RTO Council (IRC).

The IRC proposed that a safety valve be allowed to address reliability issues that were not previously identified or anticipated, or that arise or become fully identified during development or implementation of state plans. It would require independent verification by reliability authorities and be limited to issues that cannot be addressed by modifying a state plan in a way that would allow it to comply under its approved compliance schedule.

“We’ve got to write these processes into the final rule itself” to make it harder for courts to throw it out, said Craig Glazer, PJM vice president of federal government policy, representing the IRC. “If you write the reliability safety valve into the rule itself, it’s harder for a district court judge to find that you’ve violated the rule.”

Gerry Cauley, CEO of the North American Electric Reliability Corp., agreed, saying it must be “baked in” the final rule.

John Moore, senior attorney for the Natural Resources Defense Council’s Sustainable FERC Project, said the rules for implementing the safety valve must be “fairly tight” to encourage states to first take advantage of the flexibility in the EPA rule.

With accurate reliability modeling, and proposer planning, “we think the reliability safety valve … will be needed a lot less than many say,” he said.

Carbon Price Adder: Rational and Cost Effective for Some, Political Poison for Others

Several witnesses, including those representing PJM and Exelon, called for implementing the rule through a carbon-price adder that would incorporate compliance into an RTO’s economic dispatch.

Kathleen Barrón, Exelon’s senior vice president of federal regulatory affairs and wholesale market policy, outlined a proposal that would have EPA set a nationwide price for carbon at a level high enough to reduce emissions to meet the Clean Power Plan’s goals. The plan is adopted from one suggested by Great River Energy, which serves 28 distribution cooperatives in Minnesota and Wisconsin.

States that opt-in would be considered in compliance under what Exelon calls a “Reliability Dispatch Safe Harbor.” Generators in those states would include the carbon fee as a variable operating cost.

The plan would boost the competitiveness of all low-carbon generators, including renewables and Exelon’s nuclear fleet, while allowing dispatch of high-emitting plants during times of high demand to ensure reliability.

States could require grid operators to return the collected carbon adders to electricity suppliers for refunds to consumers, mitigating compliance costs, Barrón said.

Exelon estimates the proposal could reduce states’ compliance costs by 75%, limiting retail rate increases to 2 to 5%.

PJM Executive Vice President for Operations Mike Kormos said a carbon price would be the simplest way for the RTO to help states achieve compliance. Although it would be more complicated, PJM could administer the system even with different states adopting different prices, he said.

“Absent an explicit price, it is unclear how an RTO would be able to allocate available run hours of units to when they are needed most,” Kormos said in his written testimony. “… Unit-specific environmental constraints could decrease price formation transparency as well as lead to congestion being transferred into uplift for which hedging is not possible.”

How would states react to such a proposal? Moeller wondered.

Maine Public Service Commissioner David Littell termed Exelon’s proposal a “very good one.” Maine is one of nine Northeast and Mid-Atlantic states in the Regional Greenhouse Gas Initiative, which administers a market-based cap-and-trade system. RGGI says it has reduced carbon emissions by 40% from 2005 levels.

But the idea is a non-starter in some other regions, such as the coal state of Kentucky. Public Service Commissioner James Gardner said complying with the Clean Power Plan will be much more difficult than meeting EPA’s Mercury and Air Toxics Standards (MATS) because the earlier rule didn’t require legislative approval.

“The key building block is the state and the state is a political entity,” said Gardner, who noted that the General Assembly has approved legislation that says the state can only include building block 1 (heat rate improvements) into its plan. “There’s no way Kentucky is going to approve a carbon price.”

Great River Energy Vice President Jon Brekke said stakeholders should push a market-based solution despite such opposition. “I think you can make a construct of the willing,” he said.

Relying on the market means you don’t have to choose winners among generation technologies in advance, he added. In contrast, EPA’s building-blocks approach treats renewables better than carbon capture and sequestration and nuclear fusion, two elusive technologies that Brekke said might become viable in the future.

Carla Peterman of the California Public Utilities Commission said the cheaper cost of compliance under a market-based system will attract reluctant states. “Once you start demonstrating that there are benefits, others will join.”

Littell agreed. Responding to a question from FERC Commissioner Norman Bay, Littell said more will join such a system “once we get through the litigation period” — court challenges to EPA’s authority. “I’m not so pessimistic” on a carbon price, he said. “Utilities are the ultimate rational actors.”

2020/2030 Deadlines

One of the most controversial aspects of EPA’s proposal is its interim 2020 carbon-reduction goals.

Gerard Anderson, CEO of DTE Energy and representing the Edison Electric Institute, said it was no problem getting consensus among EEI members on the need for a longer timeline for compliance. The EPA plan, he said, is the “most fundamental transformation of our bulk power stem that we have ever undertaken.”

Anderson said the plan requires most states to implement 50% of their compliance by 2020 and 11 states, including Michigan, to achieve 75% of their goal by the interim deadline.

Anderson said compliance could mean shuttering of 85 coal-fired generators in MISO, including 12 DTE generators representing 40% of energy production and 30% of peak production. “The front end of this is compressed in a way that affects reliability,” he said.

Jay Morrison, vice president of regulatory affairs for the National Rural Electricity Cooperative Association, said his members are concerned about the “early cliff” of the 2020 interim goals, with some fearing they won’t be able to comply with the final targets by 2030.

Morrison asked FERC to “recognize that reliability and affordability are two sides of the same coin.” Policymakers will have failed, he said, if “we keep the lights on but consumers can’t afford to flip the switch.”

Susan Kelley, president of the American Public Power Association, agreed. “Removing the 2020 cliff would be a huge help, but it doesn’t solve all the problems.”

Alexandra Dunn, executive director of the Environmental Council of the States, said the compressed timelines could result in less efficient, state-by-state compliance. “I’ve had states say ‘I don’t have time to work across state lines. I will have to write a plan that’s just about my state.’”

The NRDC’s Moore insisted “the rule doesn’t have a 2020 cliff.”

“We strongly disagree with the idea that resources are all facing that deadline,” he said, noting EPA’s requirement that states meet average emission targets between 2020 and 2029.

He said the reliability modeling NERC and some regions have done failed to fully account for new replacement generation above the minimum levels specified in the building blocks.

Interregional Transmission

Several speakers touched on the subject of interregional transmission, which could help deliver wind power to load centers that require low-carbon generation.

“Don’t hold your breath on interregional transmission,” said Moeller, “because Order 1000 kind of punted on that.” The order requires transmission providers only to “consider” whether the needs identified in their local and regional transmission plans could be addressed most cost-effectively through joint projects with a neighboring region.

Rob Gramlich, the American Wind Energy Association’s senior vice president for government and public affairs, said the commission should reconsider Order 1000’s public policy provision, which he said didn’t anticipate the Clean Power Plan. The order requires transmission providers only to identify transmission needs driven by public policies, and potential solutions, in their plans.

NRDC’s Moore agreed, saying “we’ve seen almost no interregional projects getting built.”