Allocating emissions allowances in the early years of a national cap-and-trade program to reduce greenhouse gas emissions is critical to minimizing the economic impact on electricity customers, particularly low-income families and energy-intensive businesses and industries, an electric utility CEO said today.

“An effective federal response to climate change will require significant resources to reduce greenhouse gas emissions. This will impact electricity customers and the economy,” said Jeff Sterba, Chairman and CEO of PNM Resources. Testifying on EEI’s behalf before the House Energy and Commerce Committee’s Energy and Environment panel, Sterba urged that emissions allowances be allocated to the electricity sector, with a transition to a full auction as new technologies become commercially available.

Under an allocation approach, utilities would receive allowances to ease the transition to a low carbon future for customers, rather than having to purchase all allowances—a framework that ultimately would reduce the cost of emissions reductions borne by utility customers. 

Electricity customers of all types—residential, commercial and industrial—would benefit under an allocation, and particularly EEI’s consensus proposal. “These customers include homes that need affordable electricity to light, heat and cool their homes and hospitals that need to keep the lights on to provide medical care. These customers also include small companies seeking to grow their businesses and large energy users who must remain competitive in the global economy,” Sterba said. “The EEI proposal would benefit all of these classes of customers, which wouldn’t be the case under a tax rebate system or ‘cap-and-dividend’ approach.”

The power sector’s experience with large cost increases during the Western energy crisis—as well as the public reaction to last year’s large gasoline price rise—shows that customers and voters respond negatively to spikes in energy prices. “Allowance allocations can help to mitigate the costs required to reduce greenhouse gas emissions necessary to address climate change. Significant increases in the costs of electricity and the goods and services it helps produce could undermine public support for a carbon-reduction program or even create a backlash against such a policy,” Sterba said.

Sterba said the Clean Air Act’s Acid Rain program, established nearly 20 years ago, demonstrates that allocations are effective and practical. Under EEI’s proposal, the power sector initially would receive 40 percent of allowances available under a cap. This represents the utilities’ share of domestic carbon dioxide emissions. Within the power sector, the vast majority of allowances should be allocated to local distribution companies (LDCs), the “wires” companies that deliver electricity directly to customers. LDC rates are regulated by state commissions, which have extensive experience in protecting customer interests. LDCs also can take into account regional variations in electricity use, generation and cost.

The allowances would be distributed among LDCs based on an even split between emissions in the base period (including emissions associated with purchased power) and retail sales. Because the electric sector includes competitive merchant generators, a portion of allowances should go to merchant coal generators based on their base-period emissions.

“Climate change is one of the most significant energy and environmental policy challenges that society has ever confronted.” Sterba said. “In order to mitigate the costs of a federal response, it is important that climate legislation harmonizes emissions targets and timetables with the availability of new technologies and includes robust cost-containment measures to protect consumers and the economy. Allocating allowances is essential to minimizing the economic impact of climate change legislation on electricity customers.”

EEI’s full written statement is available at www.eei.org.