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To Prevent Power Company Windfall, NARUC Urges White House to Allocate Free Credits to LDCs

WASHINGTON—State utility regulators recommended today that the White House consider allocating free emissions allowances to local regulated utilities as a means to keep costs down and prevent windfall profits as part of a cap-and-trade system to reduce greenhouse gas emissions.

The National Association of Regulatory Utility Commissioners outlined this approach in a letter to Office of Management and Budget Director Peter Orszag. NARUC sent the letter in response to Director Orszag's concerns, outlined in the White House’s proposed budget for Fiscal Year 2010, over whether allocating free allowances in a cap-and-trade system to industry will result in a massive corporate handout.

"NARUC shares your stated concerns that no-cost allowances allocated to private companies could produce windfall profits for their shareholders," NARUC President Frederick Butler of New Jersey and NARUC Task Force on Climate Policy Leader Rick Morgan of the District of Columbia wrote.

In the letter, President Butler and Commissioner Morgan detailed NARUC’s proposal that avoids the “windfall profits” problem by allocating any free emission credits for the electricity sector to the local distribution companies (LDCs) that are regulated by State public service commissions.

“State public utility commissioners are obligated to account for the receipt of valuable allowances as utility income,” NARUC said. “Thus, such an allocation ensures that allowance value will be used for public purposes rather than to enhance the profits of private investors. Under State regulation, this value would be passed along to the utility’s consumers in the form of lower prices or through additional expenditures for energy efficiency or low-income assistance programs.”

Allocating transitional no-cost allowances to regulated LDCs “offers a potential mechanism for returning some of the revenues associated with pricing greenhouse gases directly to the very consumers who will be required to pay resulting higher energy prices,” the letter said. “This approach could help minimize any potential economic dislocation for consumers during the transition to 100-percent auctioning of allowances, while emitters would still feel the full effect of pricing GHG emissions.”

NARUC adopted this policy in a November 2007 resolution. The Resolution, available on the NARUC website, formally endorsed federal action on climate change because doing so would remove uncertainties that are hampering State regulators and the utility industry from making critical infrastructure upgrades. The resolution also detailed a number of principles Congress and the White House should consider in the event that the federal government adopts a cap-and-trade policy.

NARUC is a non-profit organization founded in 1889 whose members include the governmental agencies that are engaged in the regulation of utilities and carriers in the fifty States, the District of Columbia, Puerto Rico and the Virgin Islands. NARUC's member agencies regulate telecommunications, energy, and water utilities. NARUC represents the interests of State public utility commissions before the three branches of the Federal government.