A few observations as to what we can expect from the incoming administration: What they ultimately get done may be a function of what they do first.

First off, our economic downturn is going to be long and deep. The headlines about over-leveraged companies going bust or paying down massive amounts of debt essentially mean that there is a lot of money that will not be invested in the U.S. next year. And by “a lot,” think trillions of dollars. This may be conservative, but in all cases the investment loss is in excess of the $700 billion bailout being provided by the feds.

I have no ability to say how long nor how deep, but money not invested into the economy = factories not built = capital equipment purchases not made = people not hired to service, deliver, and build stuff (green or otherwise). Some recessions driven by temporary external factors, like 9/11, or single-sector bubbles, like the dot-com collapse, are shallow. Recessions driven by a seize up in the financial markets have a habit of being pretty deep.

Why does this matter to the environmental agenda?

The Obama camp has made it clear that energy and environment will be a priority when they get into office. That’s great news.

That said, it’s probably also safe to consider that there will be a massive backlash against Congress in 2010. Let’s hope I’m wrong about the severity of the economic meltdown. But if I’m not, then we’re going to have lots of angry, comparatively impoverished, and jobless voters come November 2009, with a throw-the-bums-out plan in the voting booth. I’m willing to guess that next year’s Karl Rove is already putting strategies together with that math in mind. So let’s assume significant Republican gains in 2010. That essentially means that the big, meaty issues that can only be accomplished so long as Obama has majority control of congress will have to be done quickly. So what are the priorities going to be?

What comes first?

It seems to me that on the energy/environment front, there are three key political issues: GHG policy, Clean Air Act reform, and a national RPS. Those may or may not be the most important long-term issues, but they all have natural constituencies, political inertia, and existing legislative language that on standby waiting for the next administration. Add those up, and my guess is that those issues become the cornerstones of a “what big stuff can we get done quickly” plan.

What’s interesting is that whichever one you start with tends to interfere with one’s ability/scope for addressing the rest. To wit:

1. GHG policy. I’m being very broad here. Maybe it’s a cap-and-trade, maybe it’s a tax, maybe it’s something else. But in any event, there’s a clear mandate to (finally!) do something. So let’s stipulate that something is done. That immediately creates a quandary for the other two issues. An RPS then becomes a tad redundant and raises a host of double-counting questions. Should a solar panel be eligible for carbon offset credits and renewable energy certificates? Should carbon prices have any market relationship to renewable energy certificates? Who shall administer? I’ve heard some in Washington oppose a national RPS on environmental grounds, arguing that an RPS is simply a sloppy way to do carbon. That argument is not without it’s merits, but without taking any sides, it’s clear that the push for a national RPS loses much strength if we already have a GHG policy in place.
2. Clean Air Act overhaul. New Source Review is busted. Massachusetts v. EPA provides a clear path to amend the CAA to include CO2. Historically, politicians have been reluctant to open up the CAA since there is no guarantee that the forces of darkness don’t find a way inside the tent. That said, there does seem to be a growing consensus that something needs to be done. So let’s now assume that this is done first. That immediately makes CO2 a pollutant as regulated by the executive branch, removing Congress’ ability to pass a bill of their own. That might be good, but it probably supplants GHG policy, at least of anywhere near the scale contemplated by Lieberman-Warner. Does it then also remove the impetus for an RPS, for the reasons outlined above?
3. National RPS. The Dems seem to think that they may finally have the votes for a national RPS. As I noted here, I’m not so sure, as the pros/cons tend to split more along geographic than party lines. But let’s assume we get one passed anyway. What does that then do to GHG policy and CAA overhaul? Given some of the goofy ways that some states have chosen to define renewability (see Conn, re: Natural gas fuel cells), it is not entirely implausible that a technology could simultaneously be incentivized under an RPS and penalized under a GHG policy. What about biomass? The PTC rules are weird enough as it is when biomass cofired with coal is not eligible, but biomass commingled with coal is eligible. Might the same confusion come to affect an RPS, with ramifications for New Source Review?

I don’t claim to have any answers, but it seems to me that there is an innate political and legal conflict between each of these activities, if taken to their logical extreme. And so I come again to my question: which do you do first?

My hope

Economically, I like the simplicity and purity of an RPS and fear the complexity and unintended consequences innate to GHG policy (at least in every jurisdiction to date that has tried to do it.) On the other hand, I’m idealistic enough to be concerned about any system that provides a higher value for CO2 reductions in some applications than others. Existing GHG policies have been far from perfect on this front, but they at least start from the premise that all CO2 shall be taxed/capped/priced equally, while an RPS is founded on the premise that some CO2 reductions are more worthy of incentive than others.

Ultimately though, I think the larger issue is legal. So long as the current Clean Air Act remains unchanged, there is a massive legal liability awaiting anyone with the temerity to pass GHG-reducing legislation. Namely, anything one is presently mandated to do under the CAA to reduce criteria pollution causes a demonstrable increase in CO2 emissions by lowering overall fuel efficiency. It is a near-certainty that lawsuits will be filed if companies are federally-compelled raise their CO2 emissions and then federally mandated to pay a penalty for same.

Given this, it would appear that you have to start with CAA overhaul. Use Mass. v. EPA as a motivation to add CO2 to the list of regulated pollutants. Shift the regulatory metric for all regulated pollutants to an output-basis, so that CO2 increases need no longer be a mandated consequence of NOx reduction. One can then separately (and sequentially) decide whether all regulated pollutants ought to be reduced via mandate or economics. I prefer the latter, but this approach at least separates the need to regulate CO2 from the methodology by which it is regulated.

Taking this tack would piss off Congress, who would suddenly lose the ability to regulate CO2 on their own. It would also put a national RPS in jeopardy. But the alternatives all seem worse.

Note: This first appeared on Grist.

Round about the time I got out of college, I (like seemingly everyone else) got a Leatherman — the Swiss Army knife cum pliers cum screwdriver that fit in your pocket. Since I was finally out of the dormitories and in my own apartment, it was handy to have a tool to assemble the odd futon, replace a busted light fixture, and take care of other odd jobs.

The great thing about the Leatherman was that it was easy to use, portable, and great for my single-guy mojo (”wait, I can fix that, I happen to have a multi-tool in my pocket”). The downside? When all’s said and done, it’s not that great a tool. My fingers always got pinched in the pliers, the screwdriver didn’t have enough leverage, and the knife always seemed rusty and dull.

Tax credits are the Leatherman of US energy policy. They’ve got massive sex appeal, and they’re relatively easy to pass compared to other fiscal measures. But when all is said and done, they’re a lousy tool.

Easy to pass

If the government passes a bill that gives a $100 million grant to the solar industry, the total cost to the federal treasury is $100 million. If, on the other hand, it passes a bill that provides a $100 million tax credit to the solar industry, the total cost to the federal treasury is … also $100 million. But the tax bill is far easier to get through, for reasons that have to do with the nuances of fiscal policy.

For reasons I do not claim to understand, a tax bill requires only one vote (Okay, three, to pass both houses of Congress and get the President’s approval, but it’s basically one process). But a grant requires two votes, first to authorize the payments and then to appropriate the money.

In theory, when Congress authorizes money, the appropriation ought to be a formality. In practice, the time between authorization and appropriation can stretch into years, with the latter decision made in a totally different fiscal environment than the former. (More cynically, one might argue that the act of authorization gives political gain to the authorizing party without any fiscal consequence, so we are prone to authorize more than we appropriate.)

The net result is that if it’s all the same to Congress anyway, it would seem that the most politically efficient thing to do is just to pass it as a tax bill, so those funds can immediately go to work, right?

Who gets paid

Not really. If a company is building big capital projects that require lots of money to construct and are eligible for tax credits, the one thing you can be virtually certain of is that the company won’t have to pay any taxes, regardless of the size of the tax credit. For those with an accounting background, you can ignore the explanation, but for those who don’t, here goes:

When you build a capital project, you are not allowed to declare all that cost as an expense. Instead, you have to spread the expense over several years. Accountants call this depreciation. In the meantime, if you borrow money to build the project, the interest payments you make on that loan also count as an expense. And for tax purposes, you only pay tax on your income, which is your total revenues minus your total expenses. So in the early years of a project, when you are still getting big credits for depreciation and paying down a lot of interest each period, you don’t have any taxable income. (This is exactly analogous to a home mortgage, which decreases your tax more in the first year than the 20th year.)

A simple example may illustrate. Suppose you’re building a million dollar capital project that has 10-year straightline depreciation (e.g., $100,000 per year). Suppose further that you borrow $400,000 of the total capital cost, which you pay off over 7 years at 8% interest. That will add another $32,000 of interest in the first year of operation. Now let’s suppose that this investment generates $120,000 of net cash to you each year. In year 1 you have a $120,000 revenue, but a $132,000 expense and therefore a $12,000 net loss. The good news is that you don’t pay any tax. The bad news is that to the extent that you also have tax credits available, you can’t use them. (The government doesn’t give money back to people who lose money, for rather obvious reasons.)

In other words, that $100 million that seemed so easy to pass is essentially useless. It’s a pile of Leathermans (Leathermen?) doled out to help people build suspension bridges. Right idea, wrong tool.

Tax equity to the rescue

Enter tax equity. You have tax losses you can’t use. Other people (most often banks) have taxable income they would prefer not to pay taxes on. Thus, we have developed a framework wherein the bank agrees to pay you some money in exchange for your tax losses. You get more cash for your project, and they get to save money on their tax bill. Everyone wins, right?

For the most part, yes. Lots of renewable projects (not to mention other tax-credit-generating projects, like low-income housing) have been built with exactly this model, using tax equity to lower the total money needed from other sources to build the project. But here’s the rub: banks don’t do this unless they can make money at it. That doesn’t make them bad, of course, but it does mean that for every $1 of tax equity, less than $1 is actually going to the company building those solar panels.

Let’s go back to our solar example. Still $1 million to build, 10 year depreciation, etc. But let’s also assume that the tax credit is providing $10,000/year to the project of tax credit. Tax equity deals are really complicated, but in that scenario, over 10 years, this project would generate something in the neighborhood of $1.2 million of total tax offsets (from credits, depreciation, and interest). Give those to a tax equity partner and they’ll pay you something like $600,000 up front for the savings. That’s nothing to sneeze at on a $1 million deal. But look at what’s happening from a policy perspective: something like 50% of the tax benefit goes to the company building the solar panel and 50% goes to the bank.

Put this more generally: the feds pass a $100 million tax credit bill, which pays $50 million to various green businesses and $50 million to banks.

I am in no way suggesting this is cause for some rabble rousing, damn-those-greedy-wall-streeters diatribe. The point here is much more substantive: we’re not getting much bang for our energy policy buck.

In today’s market it is even worse, as lots of those banks that used to be providing tax equity are now in a situation where they are losing money hand over fist and have no use for tax credits either. The immediate result is that about 50% of the tax equity market no longer exists, and those that remain in are finding it possible to charge a higher price for their services. Again, that’s nothing to get riled up about — supply and demand, after all. The problem isn’t the bank. It’s the tool.

Better ways

As reported by Greenwire this week ($ub req’d), the renewable energy community is rather concerned of late about the dry up in tax equity markets. This is galvanizing an effort to try to amend the recently-extended tax credits so that green companies can use the credits themselves. Elsewhere, there have been some rumors about a partial repeal of the 1982 Tax Equity and Fiscal Responsibility Act (TEFRA), to allow individuals to invest in these tax credits (in other words, give Main St. access to tax offsets currently available only to Wall St.). Both arguments have their merits.

Personally — and perhaps naively — though, it seems to me that it would be vastly simpler to find some vehicle other than the tax code in which to drive energy policy. As noted above, direct payments from the federal government have the same fiscal cost as tax credits, but can be much more precisely targeted. But for the authorization/appropriation challenge, it seems like a vastly better idea. Federal actions to create (or unencumber) markets so that others can make direct payments (a la an RPS or a cap & trade) would have similar benefits and advantages over tax credits.

None of these are perfect, any more than there is one single tool that is perfect for all home projects. But at least from my vantage point, using tax policy to shape energy policy is about the least economically and societally efficient of the bunch.

Note: This first appeared on Grist.

With apologies to Little Milton.

Good news: With the incoming Obama administration, we are finally going to get some sort of a greenhouse gas (GHG) bill.

Bad news: We are still having an inane, economically uninformed conversation about GHG policy.

Many of the ideas that pass for Serious GHG Policy are silly, not because they aren’t serious but because they are based on economic theories that are as widely believed as they are at odds with the way all of us (economists included) actually behave.

The crux of the problem lies in the fact that policymakers, economists, and, yeah, some bloggers completely misunderstand the link between costs and prices.

There are a host of GHG models based on upstream carbon pricing, wherein GHG emissions are priced not at the point of GHG release (i.e., where the fire is), but at the point of fuel purchase. This was innate to Lieberman-Warner and is still found in many current cap & somethin’ and carbon tax proposals. The theory is that if you put a cost somewhere in the upstream end of the system, it will cascade downstream to affect point-of-use decisions. The idea is nonsense, worthy of Wolfgang Pauli’s famous put-down: it’s so bad it’s “not even wrong.”

The crazy thing is that outside of idle economic theorizing, no one really believes the idea. When gasoline prices go up, do you expect trucking companies profits to stay the same? When health insurance costs rise, does your boss give you a raise so that your take home pay will be unaffected? When your local phone company outsources directory assistance to some dude in Bangladesh, do their rates fall to reflect their lower cost structure?

Of course not. Yet we assume that if we put a price on carbon at the point of fuel purchase, it will diffuse perfectly through the system, affecting everyone downstream who burns fuel and release GHGs. It won’t. And to the degree that it doesn’t, an upstream GHG price is an economically flawed GHG price, disproportionately shifting the burden of GHG abatement away from those actually releasing GHGs into the atmosphere — and, therefore, failing to provide an effective incentive to reduce GHG emissions.

Obvious as it may be, it bears noting that companies set prices based on a wide number of variables, only one of which is cost:

1. Some customers are more profitable than others, reflecting the reality that it is easier to pass costs along to some customers than others. For example, fuel providers commonly make more profit on small businesses than large businesses, because the small guys have a harder time changing suppliers. Should those fuel providers have to pay carbon taxes on their fuel, they may well decide to “stick it to the little guys,” leaving the biggest users agnostic on GHG emissions.
2. While economics tends to assume that all prices are variable (e.g., $X per widget), many pricing schemes have much more complicated structures, with set-up fees, membership fees, and use fees all combining to (intentionally) hide the full cost of service and make the decision to incrementally use a product appear relatively cheap. (Think of your gym, or your ATM.) In the energy sector, many gas and electric rates have a fixed monthly fee for the contract plus a low variable cost for use. If the cost of upstream GHG emissions is borne in the fixed cost, it will have no more effect on the decision to reduce fossil fuel use than your gym’s initiation fee does on your decision to work out tomorrow.
3. In many cases, much or all of the impact of a change in cost is not borne at all by a company’s customers, but by their owners. When oil prices fall, refinery profits tend to rise, as falling costs boost their profitability. Conversely, when fuel costs rise, airline profits tend to fall, for the opposite reason. It is quite reasonable to assume that a world with upstream GHG pricing will lead to lower profits for fossil fuel producers and distributors (many in the environmental community would very much like to see this). But if it does, that necessarily means that fossil fuel users are not seeing the full price signal. Corporate profits would fall, but day-to-day emission-causing behavior would not change.

None of this is complicated. But it is far too frequently glossed over with grossly simplistic economic theory utterly at odds with the reality of price-setting. And to the extent we base GHG policy on these flawed theories, there is a very real danger that we will craft a GHG policy that won’t work. The stakes are too high to get this wrong.

Note: This first appeared on Grist.

Decoupling is all the rage. The Obama campaign has made it a key part of their plan (as David gushed here), and many states have instituted decoupling proceedings to change the way that their electric and gas utilities get paid.

The good news on decoupling is directional; utilities currently have a strong incentive to keep their customers from investing in energy efficiency, and decoupling provides a way to address that.

But decoupling is hardly a panacea. We need quick, large-scale changes in fossil energy consumption to address climate change. From my vantage point, we need a long-yardage pass play, and decoupling — while still heading down the field — is a short-yardage running play up the middle.

In all cases though, as the decoupling concept gains momentum, it is critical we understand the nuances. Here is my attempt to provide some.

First off, I must admit that I have learned almost everything I know about decoupling from the good people at the Regulatory Assistance Project. (Note to any policy-makers reading this post: If you want to institute decoupling proceedings, go directly to RAP. Do not pass go.)

Theory of decoupling

The basic idea of decoupling is as follows: regulated utilities have to spend a lot of money on capital investment that is fixed (power plants, wires, pipes, etc.) They have to pay for this capital regardless of how much energy they sell. Meanwhile, their revenues are earned largely on a variable basis (e.g., per MWh of power consumed). As a result, a small reduction in their sales has a big impact on their profits, and therefore on their ability to return money to their shareholders. As Wayne Shirley of RAP points out here [PDF] (see p. 14 in particular), a 5 percent fall in sales for a utility can reduce their profits by 59 percent. Needless to say, this provides a strong incentive to make sure sales don’t fall.

Historically, this has led to a plethora of utility rates that stand in direct opposition to the public interest from tiered pricing schedules that depress the value (to the consumer) of a MWh of conservation to special “cogen-killer” rates that provide big industrial customers with discounts as long as they agree never to cogenerate their own power. In a competitive business, such rates would be anti-trust violations … but monopoly utilities aren’t subject to anti-trust regulations, and have therefore promulgated a century of rates and practices that create massive barriers to energy efficiency.

Enter decoupling. The idea behind it is that if you “decouple” utility revenues from their sales, you remove the implicit penalty to utility shareholders caused by efficiency.

… But it’s tricky

As you might imagine, it’s a bit complicated. The easiest way (which amazingly, I have heard utilities ask for) is simply to convert all utility tariffs from a c/kWh charge to a $/month charge. Presto: rates are decoupled! Utilities get paid the same amount of money every month, regardless of what their customers do.

The problem with such an approach, of course, is that it also removes any incentive for the customer to conserve. (If your monthly utility bill doesn’t vary with use, there not only is no incentive to install a solar panel on your roof, but there’s also no incentive to close your refrigerator door.) The best approaches (like RAP’s) work by keeping customer rates on a $/MWh basis, but changing the way the way that these rates translate into utility revenues.

Without getting into the details, you can think of this as essentially a formula to reset utility revenue targets (and therefore c/kWh rates) on a regular basis, such that as total kWh sales change, utilities always get the same amount of money.

The good news is fairly obvious: Utilities no longer get penalized every time their customers conserve. But the bad news isn’t to be dismissed. In particular:

1. It removes a disincentive, but doesn’t actually create an incentive. To RAP’s credit, they have recognized this and recommend that decoupling be coupled with a so-called “Performance-Based Rate” that lets utilities make more money if the efficiency of their system goes up. It’s a good idea, but far from universal in the decoupling conversation.
2. It essentially transfers risks from the utility to the customer. In a pre-decoupling world, utilities are exposed to the risk of economic, weather, and efficiency-related load volatility. In a decoupled world, some or all of these risks are transferred to customers, who can now see higher rates per MWh as their MWh consumption falls. Maybe this is a net positive, but there is clearly a cost that ought to be acknowledged any time one is transferring risk to the consumer.

And now, the complicated news. Here we get into the really interesting parts and the nuance lost in much of the decoupling conversation.

1. The theory of modern utility rate design is that utility returns on capital should be commensurate with utility risk. This is a central idea of all capital budgeting, which makes perfect sense on a moment’s reflection. (If you were considering two investments, and in one of them you could lose all your money while in the other one you could never lose your money, you would be unlikely to invest in the first idea unless it had a much higher “upside.”) So since decoupling reduces the risks faced by the regulated utility, shouldn’t it also reduce their returns on equity? (In other words, shouldn’t decoupling be “coupled” to a reduction in utility rates?) The answer is an overwhelming yes, especially since decoupling is transferring that risk to the consumer, who ought to be compensated. But to the best of my knowledge, this is largely omitted from the current decoupling conversation.
2. The fact that utility profits fall disproportionately as their revenues fall also works the other way, with utilities earning massive increases in their overall profitability with small increases in revenues. As a result, the utilities that have been quickest to embrace decoupling are those with falling sales, while those who are most hostile to the concept are those with rising sales. This creates odd bedfellows and odd tensions, but most interestingly, it forces rate-makers and utilities to acknowledge a flaw in the regulatory process that has previously been easy (and convenient) to overlook.

But the biggest issue goes back to the need for a long-bomb to the end zone. The problem with modern utility regulation isn’t rate design, but the innate conflict of a for-profit company with a government-guaranteed monopoly. Such an enterprise always finds itself in a situation where the interests of its customers are directly opposed by the interests of its shareholders. Decoupling doesn’t address this problem; it simply adds a wrinkle to the rules within that framework. This “tweaking within the paradigm” has the benefit of being politically relatively easy, but when the world needs a paradigm shift, it is not sufficient.

So should we decouple? That depends on your ambition and political calculus. But in all cases, we should not confuse this short-term triage with a long-term solution.

Note: This first appeared on Grist.

A great frustration for those who (a) really care about reducing CO2, and (b) believe in the power of well-structured market mechanisms is that the current discussion around carbon policy has bastardized the language of environmental economics. There are tremendous economic and environmental benefits to be gained by a true cap-and-trade CO2 system. Unfortunately, all the plans that are currently being bandied about as cap-and-trade structures are really carbon taxes.

To understand why, we need to review a couple basic environmental economic concepts. There are essentially three ways that government can induce environmentally responsible behavior: mandates, taxes, and tradeable permits.

Mandates

The best example of a mandate is the Clean Air Act, and since we first started crafting environmental regulation, this has been the dominant approach. Thou shalt unlead thy gasoline. Thou shalt install a baghouse. Thou shalt comply with Best Available Control Technologies. In all cases, these are top-down, proscriptive approaches that mandate technologies and/or pollution limits. Their great advantage is that their environmental impacts can be known with some degree of certainty. (e.g., if you mandate a phase-out of leaded gasoline in five years, you can be certain that there will be no more lead emissions from tailpipes five years hence.) The disadvantage of these approaches are two-fold:

1. They are economically ignorant. If the mandate does not direct the lowest-cost pollution control solution, the lowest-cost pollution control solution will not be deployed.
2. They are strictly pass-fail, and encourage a nation of D students, environmentally speaking. If a mandate compels my factory to achieve no more than 10 ppm NOx emissions as a prerequisite of operation, I’ll make sure I can achieve 9.9 ppm NOx; but since there’s no incentive to make deeper cuts, I won’t reduce any further. This adds to the economic problem with mandates, since it does not differentiate between the individual who can make deep cuts cheaply and the one who faces huge costs for shallow cuts — and in so doing, fails to maximize pollution reduction.

Pollution taxes

A better tool is a tax. Such models simply price the externality, so that one can still pollute, but only at a price. Relative to mandates, their great disadvantage is that they do not lead to certain reductions. I can mandate the elimination of leaded gasoline and know that leaded gasoline will go away, but if I instead place an added tax on leaded gasoline, I cannot be certain that the tax will be sufficiently high to eliminate its use.

On the other hand, pollution taxes do solve the two problems with mandates. By placing a fixed and known price on pollution, markets are encouraged to use the lowest-cost means of pollution control to minimize their net pollution payment. Moreover, since the tax is paid per unit of pollution emitted, deeper pollution reductions afford greater economic savings. On balance, this gives pollution taxes (in my opinion, at least) a net benefit against mandates. But they still have a couple glaring weaknesses:

1. Most obviously, they include the word “tax,” which is often a political non-starter.
2. They are sticks without carrots. Like income taxes, they constitute a great source of government revenue and, on the margin, do compel markets to factor the price of pollution into their math, but they don’t provide any more direct incentive to invest in pollution reducing technology than an income tax provides an incentive to quit your job.
3. As noted above, they do not guarantee pollution reductions.
4. Finally, they are politically uncertain. Governments are always tempted to fiddle with tax policy, but are unable to fiddle with existing contracts. A factory that installs a scrubber to comply with sulfur pollution regulations will cry foul (and have ample legal protection) if the regulator comes back and tries to rescind their permit five years hence. On the other hand, if sulfur emissions are taxed at$20/ton and government decides to lower or raise the tax five years hence, the same factory cannot readily complain that they invested in their scrubber in anticipation of a permanent tax regime. As a result, it is considerably harder to deploy capital in response to a pollution tax than in other, contractual approaches.

Tradeable permits

In theory, tradeable permits are the ne plus ultra of pollution regulation, correcting all the failures of the above mechanisms. The model is that the government sets an allowed level of overall pollution (thereby ensuring that future pollution levels are known) and then allows pollution sources and sinks to trade among themselves for the rights to emit their pollution levels within that cap. Government’s role is to set the cap and ensure that sufficient measurement and verification is in place between pollution buyers and sellers, but not to stipulate technologies nor price.

These models ensure that markets are always pursuing the lowest-cost pollution-reduction measures, while still ensuring that pollution is reduced to environmentally acceptable levels. The political consequences of a tax are avoided and sticks are perfectly balanced with carrots (since every buyer is matched to a seller at the same price per unit of pollution).

Applying to modern GHG policy

This didactic review is necessary because if you only read the headlines, you might be tempted to conclude that current GHG policy is actually based on the idea of tradeable permits. After all, we talked about carbon taxes and decided we’d do cap-and-trade instead. Since the phrase “cap-and-trade” includes the words “cap” and “trade,” it must include both, right?

Sadly, no.

Every GHG policy out there today — from RGGI to Kyoto — is really a tax masquerading as a cap-and-trade. Notice why:

1. A pollution tax requires polluters to pay money to a regulatory body, who then distributes the proceeds as they see fit. A tradeable permit approach is based on bilateral trading of pollution credits without any government intermediary. Every existing GHG policy has a government intermediary and is therefore structured as a tax rather than a tradeable permit.
2. A tradeable permit model provides an incentive to reduce pollution that is exactly the same as the cost it stipulates for those who choose to pollute. If you want to release 50 units of pollution and I want to reduce pollution by 50 units and I agree to sell you my reduction for $200, you’ve paid $4/unit and I have been paid $4/unit. By contrast, a pollution tax places a cost on pollution, but the only benefit that accrues to those who are reducing pollution is the avoidance of a tax. Which, as noted above, is the same benefit that accrues to those who don’t have any income. All of our current GHG policies are structured more like taxes than tradeable permits since regulatory agencies use the proceeds of their GHG auctions to provide a variety of social goods, not all of which lead to GHG reductions; ergo, less than 100 percent of the proceeds go to GHG reduction, and the value of reduction is less than the cost of pollution.

If the issue were merely semantic, this wouldn’t be worth making a big deal about, but the problems with carbon taxes are real, and they don’t go away simply because we choose to relabel a tax as a tradeable permit. As we go into the next political season and get serious about GHG policy, let’s hope that we don’t lose sight of these realities.

Note: This first appeared on Grist.

As we think about how to price GHG emissions, it’s often (and accurately) cited that having a meaningful conversation about GHG pricing first requires that we remove all the existing subsidies so that we can stop irrationally allocating capital. Clearly, we can’t provide insurance liability waivers to nuclear and ratepayer guarantees to regulated utilities and then conclude that Monty Burns’ access to capital represents the action of unfettered markets.

Let’s ask the obvious question: how much do various technologies cost us, per ton of CO2 reduced, on an all-else equal basis? If we are already rationally allocating capital between our alternatives, then the differential addition of an actual price on CO2 ought to only help the good technologies proceed a bit further over the line. As you might imagine, we aren’t. And as I alluded to here, the environmental community deserves some of the blame.

Here’s my math. I’m a heat and power guy, so I did my math on those sectors of the economy. I’d welcome anyone with expertise in transportation and other sectors to number-crunch accordingly.

First, the baseline. Average retail power prices in the U.S. today are about $90/MWh. Average U.S. CO2 emissions per unit of electricity consumed are about 0.6 metric tons/MWh. Both values are on a delivered basis so that we can accurately compare central and local generation technologies.

Let’s say we had a technology that could produce power with 0.3 metric tons/MWh of delivered power and that the resulting power would cost $120/MWh. That gives us a $30/MWh “cost” and a 0.3 metric ton/MWh benefit, for a net cost per ton of benefit of $30/0.3, or $100/ton. How do the usual suspects stack up?

Assumptions

If I knew how to embed spreadsheets in posts, I would. But I don’t. (If anyone wants the spreadsheet, email me and I’ll send it to you.) Suffice to say though that I had to make some simplifying assumptions.

Most importantly, any level playing field has to assume that all market participants have equal access to capital. This of course isn’t true, but energy markets are highly regulated; to the extent one party has access to cheaper capital than the other, it is almost certainly because of a regulation that tilts the existing playing field (see the earlier comments on nuclear). So I assumed that every technology can find investors who are willing to recover their capital with 12 percent interest over 20 years, on an unlevered basis. This is faster capital recovery than regulated utilities get, but lower than private equity demands. Moreover, to the extent that our regulatory environment is allowing anyone to recover cheaper capital (whether through loan guarantees, ratepayer underwriting or some other mechanism), it is implicitly creating a public subsidy. By holding our capital recovery assumptions constant, we can ask ourselves whether the subsidy is worth paying per ton of CO2 reduction, rather than simply accepting the difference as a persistent reality.)

Other assumptions of note:

• Central generation requires $1,400/kW transmission and distribution to connect to load; local generation avoids this capital cost.
• Transmission and distribution, if required, adds 9.5 percent line losses, thus requiring 1.095 MW of installed upstream generation per MW of delivered load.
• Natural gas costs $8/MMBtu, Coal costs $2/MMBtu.
• Plants that recover waste heat displace natural gas-fired boilers

The T&D capital and loss numbers are based on U.S. averages. Natural gas and coal prices are roughly representative of current U.S. markets. The cogen assumption is pretty typical, for the simple reason that no one who is installing a modern boiler can get much besides natural gas permitted. All of these assumptions could be varied of course, but they set the baseline.

Comparative costs per ton

Let’s start with coal with carbon capture and storage. For the sake of argument, we’ll assume the technology works. (No small assumption, but at least consistent with the assumptions made for all other technologies.) I assume $6,500/kW for capital costs, per FutureGen. Add in T&D costs and assume appropriate line losses, and you need to recover $1,158 per kilowatt, per year in order to pay off your capital. Add in fuel and labor costs and you’re up to $1,398 per kW-year. Meanwhile, an average U.S. coal plant today only runs about 72 percent of the time, meaning that this kilowatt of capacity will generate 8,760 x 72 percent = 6,307 kWh per year.

Note to non-power wonks: There are 365 days in a year, 24 hours in a day, or 365 x 24 = 8,760 hours in a year. Thus, one kilowatt can generate a maximum of 8,760 kilowatt-hours in a year.

Back to our math. $1,398 / 6,307 = 22.2 cents/kWh for power from coal with carbon-sequestration, or $222/MWh. Compare this to current retail electric rates of $90/MWh, and this implies that coal plus CCS would raise power costs by $132/MWh. Meanwhile, it would save 0.6 metric tons/MWh, giving us an overall cost of $132/0.6 = $219/ton.

In other words, if we took away every subsidy in the system and compelled coal plus carbon sequestration to compete on a level playing field, it wouldn’t compete until CO2 prices exceeded $200/ton, or about 10 times what they are currently trading for in Europe. It is no exaggeration to conclude that a rational market that fully factored in the cost of CO2 emissions would never invest in coal plus CCS (at least not until it had exhausted lots of other, much more cost-effective options).

So how do other technologies compare?

Nuclear is only slightly better, requiring $157/ton. (The causes are very similar to coal plus CCS: high capital costs plus the costs of transmission and distribution.)

Combined cycle gas turbines can achieve 50 percent fuel-to-electric efficiencies, giving an overall carbon signature of 0.4 tons/MWh. That’s a bit better than the grid, but they use expensive natural gas and still require wires to connect them to the load. In aggregate, they shake out at $287/ton — even worse than coal + CCS.

Now let’s look at traditional renewables.

• Central wind farms (e.g., those that still require T&D) cost $131/ton. Better than coal plus CCS, better than nukes, and better than CCGT — but still above where most are estimating CO2 markets will settle out. (Note to wind wonks: I assume $2,500/kW for the turbine and a 40 percent annual capacity factor. I suspect the latter may be generous.)
• Sustainably harvested (e.g., CO2-neutral) biomass in a central power plant costs $108/ton.
• Solar PV requires a whopping $1,047/ton. (This assumes locally generated solar power, thus avoiding T&D costs; centrally generated solar is much worse.)
• Geothermal is the cream of the crop in the renewable space, requiring just $11/ton.

The lesson of this list? It’s all about capacity factor. Intermittent renewables simply have a hard time recovering capital, because they don’t run very often. (Put another way, a solar plant that runs 20 percent of the time has to cost one-fourth as much as a geothermal plant that runs 80 percent of the time to be competitive per ton of CO2 reduced.) Free fuel certainly helps (and explains why geothermal compares so favorably to biomass, where I assume $3/MMBtu fuel), but ultimately, capacity factor constraints are hard to get around.

Now how about locally-generated sources? All CHP is locally generated, since you can’t move heat very far:

• 60 percent efficient, natural-gas fired cogen costs $60/ton.
• 90 percent efficient, natural-gas fired cogen saves $54/ton. (Or, if you prefer, costs negative $54/ton.)
• Biomass with waste heat recovery saves $135/ton.
• Recycled industrial waste heat without a cogen cycle (e.g., recovered only for power) saves $91/ton.
• Recycled industrial waste heat with a cogen cycle saves $103/ton.

Conclusions

This list is not exhaustive, and I certainly don’t mean to imply that we now know which winners to pick. But in a world that really cares about CO2 reduction and that must operate under fiscal constraints, any decision to preferentially shift resources towards the highest cost approaches is a decision not to maximize the rate of GHG reduction.

And the temptation to pick winners is no less present among those lobbying for coal plus CCS than it is for those in the environmental community who insist upon a 100 percent solar grid. Both paths have the potential to reduce CO2, but neither does it in an economically-responsible way, and therefore neither does it in a way that will maximize the rate of GHG-reduction.

A few final observations:

1. To the extent that our current policy conversation is beginning to take CO2 reduction seriously, it is focused almost exclusively on the most expensive approaches. This is irresponsible.
2. The technologies being deployed in response to current RPS markets are almost universally the most expensive routes to CO2 reduction.
3. We’ve got an awful lot of playing field to level to get this right.

Note: This first appeared on Grist.

Two troubling things I heard last week:

1. The on-going question about what our next president will sacrifice in the name of the economy. If the financial crisis has taught us nothing else, it is that federal coffers are not infinite, and something will inevitably give.
2. At a panel on GHG policy in Washington, congressional staffers for Sen. Byron Dorgan (D-N.D.) and Rep. Jay Inslee (D-Wash.) conceded that the RGGI auction — and specifically, the $40 million raised for the northeastern states — will create some need for the feds to “give,” once the feds pass auctions of their own.

These are closely related and direct results of an environmental policy that continues to remain hostile to economic responsibility.

We must get over the idea that minimizing the cost per ton of GHG reduction somehow cheapens our environmental credentials. Financial resources are finite, and any decision not to minimize the cost per ton reduced is algebraically equivalent to a decision not to maximize the total tons of GHG reduction.

The responsible end of the environmental spectrum knows this, but the policy environment still doesn’t. Both RGGI and Lieberman-Warner have been set up to focus resources only on the most expensive means of GHG reduction, and while their exclusion of more cost-effective sources from participation wasn’t intentional, it wasn’t responsible either.

(Note: RGGI only allows participation by generators 25 MW and over, with any other CO2 source or sink participating only through offset auctions with the rules of offset engagement left up to the individual states. Lieberman-Warner died, thankfully, but its central precept that GHG reduction will be economically painful remains the dominant policy framework in Washington.)

As a result, we find ourselves in a situation where well-intentioned, but fiscally responsible politicians are going to be under pressure to put off the passage of GHG policy, based on the bogus idea that it will deepen our financial malaise.

But the bigger impact is that we lower our expectations, and write regulations that become self-fulfilling prophesies. This vicious cycle is often overlooked, but needs to be better understood. Let’s start with a simple analogy, and then see how this relates to GHG policy.

Dumb analogy

You are the King of Broccoli-land, a nation where everyone eats nothing but broccoli. For years, none of your subjects knew any better, and could not contemplate a world where any other foodstuff was available. However, in recent years, your soils have become depleted in various nutrients from your monoculture plantations. You send your Learned Scientists abroad to study possible solutions, and they come back with fabulous stories of trips to exotic lands far away — - in particular, Ice Cream Land, a world where no one eats anything but Ice Cream. In this land, they have cattle for milk, chickens for eggs, cocoa, sugar, and vanilla bean plantations. As their land becomes depleted, they rotate in crops of pistachios, strawberries, and chocolate chip cookie dough. Better still, it tastes awesome.

So you decree that your nation will commence a 20-year shift away from Broccoli toward Ice Cream. You will impose a tax on broccoli growth to dissuade broccoli harvest. You will use the proceeds of this tax to provide job re-training to broccoli farmers, to fund Ice Cream research and deployment programs, and to buy fertilizer to replace diminished soils. Just to be (personally) safe you will distribute massive amounts of government wealth to the Broccoli Land Broccoli Company, Ltd., to ease their transition into your low-broccoli future.

Dumb reality

If only the above example had nothing to do with the current situation. Our broccoli king assumed that de-broccolification would be painful, and that all likely solutions to the broccoli problem were known by the Learned Scientists. Having concluded thus, the policy was written to ensure that it would be painful, and that money would flow only to those ideas favored by the Learned Scientists. Years later, history will agree with the King. It really was expensive to shift an economy from broccoli to ice cream — not because it really was expensive, nor because ice cream is the only solution to the broccoli problem, but because if the regulations are set up to demand expensive ice cream, that’s what they will get. Reality was constrained so severely that the public comes to conclude that there were no alternatives. We know better right?

Not really. Because this is exactly what we are doing in our GHG debate. We assume it will be painful, so we take money and throw it at adaptation, R&D, and other public goods. We assume we must buy off the existing polluters, confusing GDP reductions with wealth transfers. And we are writing policies that get what we expect.

The proof? First, because politicians are already talking about making sacrifices due to the financial crisis, and GHG policy is on the list of potential things to be delayed.

But the RGGI issue is more problematic. The RGGI auction took in $40 million for the states, and the feds now see this as $40 million that they can’t take, lest they lose the state’s support for federal policy. But here’s the rub: if the state is collecting money that it counts as revenue, it’s not a cap-and-trade! It’s a tax by another name. And taxes on carbon provide no more incentive for carbon reduction than taxes on income provide incentives for poverty. (Or, if you prefer, than broccoli taxes and ice cream R&D credits provide incentives for boulangerie construction.)

So where does this leave us?

One, with a policy debate that is increasingly tempting to put off until we put this fiscal crisis behind us. Two, with a set of policy ideas that ensure that GHG reduction will be expensive.

Both of these outcomes are environmentally dangerous. And the environmental community deserves some of the blame, which I will address in my next post.

Note: This first appeared on Grist.

A simple syllogism to expose the flaws in our GHG debate:

1. Fossil fuels cost money.
2. When burned, fossil fuels emit CO2.
3. Therefore, burning less fossil fuel saves money and CO2.

The logic is impeccable (even if not quite as entertaining as Lewis Carroll’s syllogisms). And yet our entire GHG debate continues to be framed as those who would damn the economy against those who would damn the environment. The debate is false, and it’s time to get beyond it.

That said, there are two ways this logic potentially breaks down, with significant ramifications for long-term employment and economic growth.

First, there is the question of practical limits. How much fossil fuel can we pull out of the economy without causing economic pain? Purists may argue that the goal is zero fossil fuel, but us non-Luddites have a hard time imagining a world without steel, silicon, ethylene, fertilizer, or any number of other products that require fossil fuel to produce.

Setting aside that argument though, there are still practical limits set by economics and thermodynamics. We can’t get more energy out of a system than we put in, and we can’t transfer energy from cold bodies to hot bodies. And economically, there is the reality of diminishing returns (e.g., it’s always cheaper to recover the first 80 percent of wasted energy than it is to recover the last 20 percent).

Someday, perhaps, we will reach those thermodynamic and/or economic limits. Suffice to say that today, we aren’t even close. Energy is easily the most regulated sector of our economy, with numerous barriers to profit-maximizing (e.g., energy conserving) capital allocation. I have personally never been to a steel mill, chemical plant, paper mill or other large, energy-consuming industrial that didn’t have high-return investment opportunities in their plants that would lower their fossil energy use. And we shouldn’t lose sight of the fact that the electric sector today is less fuel efficient than it was in 1910.

But there is a second, more awkward way in which the GHG syllogism can fail us: if our economy is significantly dependent on fuel extraction. When energy costs rise, energy consumers — home owners, truck drivers, manufacturers, etc. — all feel the pinch. But folks who dig coal or drill oil benefit. (A political point not lost on any politician who has ever stood in front of a group of coal miners to roll out their energy policy.)

So let’s look at the numbers. The Bureau of Economic Analysis and the Bureau of Labor Statistics keep exhaustive data on the U.S. economy, by sector. I’ve separated below by looking on the one hand at the two sectors of the economy that are most adversely affected by higher energy costs (manufacturing and transportation) and on the other hand at those sectors of the economy that most benefit from higher energy costs (oil & gas extraction and coal mining).

Minor caveat 1: clearly, energy users are also adversely impacted by higher costs, but they don’t separate from the data as cleanly, and I was reluctant to include economic data from service sectors that are only indirectly affected by energy costs. To the extent this understates the impact, the conclusions below are all the stronger.

Minor caveat 2: coal mining is actually not broken out as a separate category, but it is lumped in with other ores. The data is what it is — but again, this error, if corrected, would make the conclusions stronger.

Let’s look at the numbers.

Manufacturing and transportation employed just over 1.8 million people in the U.S. as of June 2008. Oil, gas, and coal extraction employed 231,000. In other words, for every one job that is adversely affected by lower energy costs, 46 benefit. Put another way, there are more votes lost by politicians who let energy costs rise than fall.

Now let’s look at dollars, value-added by sector. Manufacturing and transportation created $1.8 trillion of economic value-added for the U.S. economy in 2006 (the most recent year for which a full data set is available). Coal, oil, and gas extraction created $202 billion of economic value added. So, for every $1 of U.S. economic activity that is put at risk by lower energy prices, $8.87 stands to gain.

Why does this matter? Because an energy policy based on drilling or mining our way out of our energy problems creates way more losers than winners, in terms of both employment and economic activity. The same is true for one that is focused only on the most expensive means of CO2 reduction — from carbon sequestration to photovoltaics.

A policy focused on energy efficiency, by contrast, will not only lower energy costs but also provide net growth in jobs and GDP. If the best we can do is to “drill baby, drill” we will create massive unemployment and economic dislocation.

The international view

One last interesting nugget. This cool website allows you to look at a map of the world on the basis of its rate of raw material extraction per dollar of GDP, per capita, or on any of several other metrics. (Units are in kg, so we can’t quite do the dollar per dollar or job per job comparisons as in the U.S., but it’s not a bad surrogate.) By comparing the U.S. to other countries — since we know that the U.S. is a net beneficiary of an efficiency-based energy policy — we can figure out where the geopolitics of a more responsible GHG policy ought to lie.

Qualitatively, I rather doubt anyone needs further proof that the Belgian economy is better than that of the Belgian Congo, and therefore it’s better to be focused on value-added manufacturing and services than resource extraction. But let’s still look at the numbers.

The U.S. in 2005 extracted 0.653 kg of fossil fuel from its territory per dollar of GDP. This is on a par with our major trading partners: China (1.849), Japan (0.007), U.K. (0.186), Canada (1.468), Mexico (0.500), and Germany (0.985).

Now let’s look at the countries that are heavily dependent on extractive industries. The top five (with the exception of Australia) are uniformly crummy places to live: Mongolia (25.37), Kazakhstan (18.23), North Korea (15.96), Serbia and Montenegro (14.48), and Australia (13.51). More Belgian Congo than Belgium.

Now let’s ask the interesting geopolitical question. Of the leading world economies in the G8 — all of which ought to be at the forefront of GHG reductions — the average extraction rate is just 1.505 kg/$. (But for the Russian Federation at 8.723, the figure would be just 0.473.) Alternatively, if we look at the average extraction rate of the top 10 CO2 emitters — who, in aggregate are responsible for 67 percent of all global GHG emissions — the average is just 1.81.

In other words, a GHG policy focused on energy efficiency — a.k.a. profitable GHG reduction — would benefit all of the world’s industrial powers and all of the major emissions sources. The idea that the developed world can’t afford to reduce its CO2 emissions is pure bunkum.

Moreover, China’s incentives are not that different from our own. (Indeed, the only country on both lists that is significantly dependent on fossil extraction is Russia, which is rather interesting in light of current geopolitical tensions.)

All of which raises an interesting question for our political candidates: Do you speak for the majority of Americans who depend on cheap energy, or for the minority of Americans who benefit from expensive energy? A GHG policy focused on efficiency benefits the majority. A GHG policy focused only on the most expensive solutions — or worse, a policy that puts the interests of coal miners above the environment — benefits the minority.

Note: This first appeared on Grist.

Wis. utilities want customers to cover all fuel volatility

Wisconsin’s five regulated electric utilities have asked to have fuel increases in gas and coal costs automatically passed along to their customers rather than wait until they can file a formal rate case.

Their regulator said no.

In a bizarre bit of doublespeak, the utilities argued that passing 100 percent of fuel volatility risk along to their customers would be good because:

Executives at several Wisconsin utilities said the changes could benefit shareholders and customers by reducing volatility.

It certainly would reduce volatility for their shareholders. But customers?

Not surprisingly, consumer groups have opposed the measure, again raising the specter of risk-shifting from shareholders to consumers. While they don’t make the link between risk and equity returns, it is the natural next step.

More problematically, one has to wonder why energy efficiency isn’t yet part of this conversation. A utility with 100 percent fuel pass-through and a 30 percent efficient fleet has no more incentive to conserve (nor penalty to waste) than one with a 50 percent efficient fleet. Take efficiency in the most holistic way possible as [total electricity out] / [total fossil fuel in] and this is a snub not just to efficiency, but also to renewables. It’s a logic that only makes sense if there are no opportunities to enhance the efficiency or renewable use in their fleet, which is, of course, nonsense. It is, however, implicit in the regulatory conversation to date.

And the conversation isn’t over:

Utility representatives said they expect more work on the fuel-cost issue to take place in 2009 … We Energies spokesman Brian Manthey said Friday the utility isn’t disappointed that the matter has been delayed until 2009, since the company still expects work to continue on a plan to change how fuel charges can be altered. The company would be more concerned if the commission were backing off altogether from changes to the fuel rules, he said.

Call me naïve, but shouldn’t we be focusing on how to alter fuel use as opposed to fuel charges?

Note: This first appeared on Grist.

Check out this article from Energy Central. A workshop in Topeka, Kansas has been trying to figure out how to incentivize Kansas utilities to embrace conservation. The local regulated utility summarizes the problem:

“We are totally committed to energy efficiency,” said Chris Giles of Kansas City Power and Light, “as long as we can have the same level of return we would earn and prohibit the loss of profit margins.”

Step one in the 12-step process is, after all, admitting that you have a problem, so I take this admission as a necessary (if not a sufficient) step in the right direction.

The sexy way du jour to address this is via decoupling, which — through some mathematical rate manipulation — enables utility revenues to be maintained even when their kWh sales fall. Needless to say, the Kansas hearings are investigating that, but as they do so, they’re exposing some rather interesting problems with the theory. For instance:

… David Springe, director of the Citizens’ Utility Ratepayer Board … noted that utilities already have succeeded in moving much of their risk — fuel costs, transmission costs, environmental costs — onto consumers. Now utilities are asking that even more risk be assumed by the consumer.

“We’ve moved just about everything that is volatile to the customer,” Springe said. “We have removed all of the risk. All that’s left is, how do we give them more money?”

This idea was echoed later:

John Perkins, a consumer advocate from Iowa, said the idea that utilities’ profits ought to be protected at all costs is wrong.

“It doesn’t matter why our revenues are down,” he said, offering a paraphrase of utilities’ position. “Just give them back to us.”

These are pretty compelling arguments, and ones that go to the heart of the so-called “regulatory compact.” The state granted a monopoly and in return expects the utility to manage the grid and bear a certain (albeit limited) degree of risk. Consistently shifting that risk off of the utility and onto the customer ultimately breaks the compact or at least compels us to ask whether we ought to revisit our base assumptions.

At which point things get interesting.

Utility regulators have an obligation to ensure that utilities earn profits on their capital investments that are high enough to attract capital to their business, but not so high as to earn unfair profits for the utilities on the backs of their captive customers. Defining this magic return is hard, but it is guided by a general principle as follows:

A public utility is entitled to such rates as will permit it to earn a return equal to that generally being made at the same time and in the same general part of the country on investments in other business undertakings which are attended by corresponding risks and uncertainties.

In other words, the utility regulator needs to figure out how risky the utility investment is, find other folks making comparably risky investments (and attracting capital) and then give the utility a comparable return. In theory, that’s easy. In practice, it’s really hard — for the simple reason that there are no unregulated businesses that face the same level of de minimus risk faced by a regulated monopoly. The difficulty of that calculation however, doesn’t diminish the fundamental link between risk and return. Since decoupling lowers the risk faced by utility investments, logic suggests that it ought to also be coupled to a reduced rate of return. In non-utility speak, that means that decoupling should lead to lower electricity rates.

No utility is likely to remind their regulator of this linkage. But it has come up in this case, again from the Citizen’s Utility Ratepayer Board:

[Springe] said that the justification for guaranteeing profits is that utilities assume risk when they make their investments, and thus deserve to be rewarded.

“Return on equity compensates them for risk,” he said. “We have to have a substantial return on equity reduction.”

Legally, he’s spot on. Politically, that is of course a hard fight, but it’s sure to be an interesting one.

Note: This first appeared on Grist.