Allocating emissions allowances under a greenhouse gas cap-and-trade program is critical to holding down electricity costs for customers of all types—large and small, rural, urban and suburban—without sacrificing environmental gains, a utility CEO said today. The Edison Electric Institute (EEI) has endorsed a climate framework calling for an 80-percent reduction in emissions by 2050 and a series of measures to protect U.S. consumers and the economy.

“Under any scenario, reductions in greenhouse gas emissions will be expensive,” Dominion Chairman, President and CEO Tom Farrell said. “The most cost-effective way to achieve them in the power sector is through the development and deployment of a full portfolio of climate-friendly technologies and measures over the long term, and by allocating emission allowances during the transition to a low-carbon economy. This is crucial if we are to achieve our dual goals of reducing emissions and maintaining reliable, affordable and clean electricity supplies in a carbon-constrained world.”

Farrell testified on EEI’s behalf during a House Energy and Commerce panel hearing on the treatment of emission allowances under the American Clean Energy and Security Act (ACES).

EEI’s membership spent two years developing a consensus proposal calling for the allocation of carbon emission allowances in order to minimize the economic impact on all electricity consumers—especially the low-income families and energy-intensive businesses and industries that will suffer the most from higher electricity costs. Farrell called the allowance allocation formula in the legislation “the essence” of EEI’s proposal. The allowance allocation concept has broad support among a variety of stakeholders, including the U.S Climate Action Partnership (USCAP), labor groups, and EEI and its member companies.

“Consumers can be assured that whether they receive electricity from a shareholder-owned utility, an electric cooperative, or a municipal utility, they will receive the benefits of the allowance program included in this legislation,” Farrell said.

Under the bill, the vast majority of allowances available to the power sector would be allocated to local distribution companies (LDCs), the wires companies that provide retail electric service to end-use customers, based on a 50/50 formula: 50 percent based on each LDC’s share of average annual electric sector CO2 emissions during the base period (including emissions associated with purchased power) and 50 percent based on each LDC’s share of average annual electricity retail sales during the base period.

The emissions component of the formula recognizes the concerns of utilities with significant fossil generation that their customers will face higher compliance costs. Emissions-based allowances would help offset those costs. The sales component factors in the concerns of other utilities whose customers already face higher prices resulting from utility investments in non-emitting power generation.

The legislation specifies that allowances must be used exclusively for “the benefit of retail ratepayers,” regardless of the size, location or ownership structure of the LDCs, which connect with every electricity customer—residential, commercial and industrial.

Another advantage of providing allowances to LDCs is that their rates are regulated by state public utility commissions (PUCs), which have extensive oversight experience and authority to ensure that allowances will be reflected in any ratemaking cases. The bill enhances the role of state commissions and grants new authority to the Environmental Protection Agency to suspend allocations in the event that any PUC or LDC does not use them appropriately.

EEI and others also recognize the importance of providing a share of allowances to merchant coal generators, which sell coal-fired power into competitive wholesale markets where prices are set by market forces and are not subject to state PUC regulation. Merchant generators produce more than 20 percent of total U.S. coal-fired generation. Providing allowances to these generators is essential to ensuring an affordable and reliable supply of electricity during the transition to a low-carbon economy.

“The continued viability of these generators is critical to maintaining adequate competition in competitive markets, assuring reliability and holding down costs to consumers,” Farrell said, who noted that the bill has many safeguards governing the use of allowances by merchant coal generators, including provisions that ensure that no allowances would be awarded to facilities that are retired.

While praising the bill’s allocation formula, EEI urged that the legislation provide a longer phase-out period of transitional allowances. The legislation currently provides for allowances to quickly decline from 35 percent to zero in the five-year period from 2025 to 2029. Because the emissions cap declines sharply from 2020 to 2030, consumer protections would be strengthened if allowances were phased out more gradually.

Farrell also noted that utilities will still face significant costs under the bill. The ambitious near-term emissions targets and the Combined Efficiency and Renewable Electricity Standard will require significant financial investments to either change the current generation profile, purchase renewable energy credits or offsets, make alternative compliance payments, purchase allowances from an auction, or some combination thereof.

“While any climate change policy will carry a significant price tag, the allowance allocation approach in this bill will minimize the economic impact on electricity customers nationwide during the early years of the program,” Farrell said. “It also will help ensure that utilities continue to provide reliable, reasonably priced electric service that supports economic growth, job creation and strong communities.”