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In Major Action, NARUC Supports Federal Climate Legislation, Spells Out Policy Options

Anaheim, Calif.--State public service commissioners took major action today expressing support for federal climate-change legislation and laying out details for how States should consider regulating in a carbon-constrained world.

In separate resolutions approved at the National Association of Regulatory Utility Commissioners' 119th Annual Convention in Anaheim, Calif., the State regulatory community established a strong foundation that will guide the Washington-based trade association as Congress moves to address new climate policies. [The resolutions are contained below.]

"These new policies mark a significant step for this Association and State utility regulators across the country," said outgoing NARUC President Jim Kerr of North Carolina. "It positions NARUC to be a major player as Congress takes up climate legislation and ensures that our views, and the views of our constituent ratepayers, will be heard."

NARUC is the trade association that represents the State public service commissioners who regulate essential utility services, such as energy, telecommunications, transportation, and water.

The first resolution ("Resolution on Federal Climate Change Legislation and Cap-and-Trade Design Principles"), spearheaded by NARUC's Task Force on Climate Policy, denotes the Association's support for federal climate legislation and, while not specifically endorsing a cap-and-trade program, offers a series of principles that Congress should consider if it implements such a program.

"These principles form a critical component of NARUC's climate policy," said Task Force Leader Rick Morgan, a Commissioner from the District of Columbia. "We recognize the need to address climate issues and to do so in a way that balances environmental and ratepayer concerns. I thank my colleagues on the Task Force and within NARUC for moving us forward."

Federal climate legislation is needed, according to the resolution, because "the existence of uncertainty about the nature and extent to which [greenhouse gas] emissions will be subject to future federal regulation makes it difficult for State regulators, regulated utilities, and others to appropriately plan for needed investments in electric transmission and generation infrastructure."

The resolution does not specifically endorse a cap-and-trade approach; rather, it notes that the Association plans to evaluate other market-based mechanisms as well.

Should Congress ultimately implement a cap-and-trade program, the resolution details principles that lawmakers should consider when adopting such a program. According to the resolution, under a cap-and-trade program:

• A 100% auction of emission credits is ultimately the most economically efficient mechanism for reducing emissions, but the allocation of allowances within the electricity sector at no cost is an appropriate transitional measure that will sustain reliability, minimize economic dislocation, and allow for the development of appropriate new technology;
  
• No-cost allowances should be allocated to Local Distribution Companies based primarily on historic emissions, which will allow State regulators or other authorities to ensure that the value of these free allowances will serve to benefit end-user consumers. Alternatively, States should be able to adopt other methods for distributing benefits to end-use consumers; and
  
• Cost-containment measures should be included to minimize abrupt changes in the cost of compliance, including during the initial phases of implementation, to minimize the impact on consumers in a method that is consistent with environmental goals.

Meanwhile, at the same meeting, NARUC approved a separate resolution ("Resolution on State Regulatory Policies Toward Climate Change") that encourages State regulators to consider adopting policy approaches and regulatory tools that ensure continued electric system reliability and minimize economic dislocation and costs to consumers. Additionally, the resolution urges States to also consider addressing the likely transition to a carbon-constrained world through several policy options, including:

• Facilitating greater reliance upon low- or no-carbon resources and technologies such as energy efficiency, high-efficiency combined heat and power, demand response, renewable generation, advanced nuclear, and emerging technologies (such as carbon capture and storage);
• Ensuring timely recovery of reasonable and prudently incurred costs associated with this transition;
• Recognizing the costs and revenue streams associated with possible future emissions cap-and- trade mechanisms;
• Supporting broad-based funding for research to enable the use of thermal and other electric generating resources that result in environmentally acceptable electric generation and demand-side resources;
• Ensuring that regulated utilities properly assess and manage climate-related risks in the procurement of resources.
  
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TEXT OF RESOLUTIONS

EL-1 Resolution on Federal Climate Legislation and Cap-and-Trade Design Principles

WHEREAS, The National Association of Regulatory Utility Commissioners (NARUC) formed a Task Force on Climate Policy in March 2007 in order to educate NARUC members concerning climate policy issues and to develop policy proposals for consideration by the NARUC membership; and

WHEREAS, The NARUC Board of Directors adopted a resolution sponsored by the Task Force on Climate Policy at the 2007 NARUC Summer Meetings held in New York, New York, on July 18, 2007, that enunciated ten policy principles that NARUC believes should inform federal climate policy; and

WHEREAS, The relative merits of a market mechanism proposed for inclusion in any federal climate change legislation, including, but not limited to, a cap-and-trade mechanism, a carbon tax, and a load-side cap, should be carefully evaluated in determining how to achieve the desired emissions reductions consistent with the ten principles previously adopted by NARUC; and

WHEREAS, Congress has continued to debate various policy proposals for addressing the environmental and economic consequences of alternative climate change policies since the 2007 NARUC Summer Meetings; and

WHEREAS, Since the 2007 NARUC Summer Meetings, the Task Force on Climate Policy has also continued to examine various policy proposals relating to climate change issues; and

WHEREAS, The momentum for enactment of federal legislation regulating the emission of greenhouse gases (GHG) appears to have further increased, making the enactment of such legislation within the foreseeable future likely; and

WHEREAS, The existence of uncertainty about the nature and extent to which GHG emissions will be subject to future federal regulation makes it difficult for State regulators, regulated utilities, and others to appropriately plan for needed investments in electric transmission and generation infrastructure; and

WHEREAS, Despite a diversity of opinion within NARUC's membership regarding the need for national limitations on the emission of GHGs for the purpose of addressing concerns over warming of the Earth's climate, NARUC's members are in general agreement that the enactment of federal legislation limiting such emissions in would be appropriate in order to remove existing uncertainties that are hampering the making of transmission and generation investment decisions; and

WHEREAS, NARUC's members are also in general agreement that appropriate federal climate change legislation should be enacted in order to enhance the likelihood that appropriate technologies will be developed and other solutions implemented so as to achieve desired reductions in GHG emissions in the most economical manner possible; now, therefore, be it

RESOLVED, That the National Association of Regulatory Utility Commissioners, convened in its November 2007 Annual Convention in Anaheim, California, supports the enactment of federal legislation intended to reduce GHG emissions so long as such legislation relies, to the extent practicable, on an appropriate market mechanism or mechanisms as part of an economy-wide approach to GHG regulation; provides for an appropriate transition period prior to the implementation of full regulation of GHG emissions; creates sufficient certainty to ensure the financing of needed energy infrastructure consistent with the achievement of the environmental objectives intended to be accomplished by such legislation; and is otherwise consistent with the policy principles developed by the Task Force on Climate Policy and approved by the NARUC Board of Directors at the 2007 NARUC Summer Meetings held in New York, New York, on July 18, 2007; and be it further

RESOLVED, That the Task Force on Climate Policy should consider and develop, as appropriate, proposed resolutions for NARUC's consideration addressing additional market mechanisms including, but not limited to,  a carbon tax and a load-side cap; and be it further

RESOLVED, That, in the event that Congress chooses to implement a cap and trade mechanism for the purpose of limiting electric sector GHG emissions, any such federal climate change legislation should rest upon the following cap-and-trade design principles in order to appropriately balance competing criteria, including, but not limited to, equity, economic efficiency, and ease of administration:

1. Auctioning of all allowances is ultimately the most economically efficient mechanism for achieving emission reduction goals from electric generation. However, the allocation of emission allowances within the electricity sector at no cost is an appropriate transitional measure in order to ensure continued reliability, minimize economic dislocation resulting from the carbon intensity of the existing electricity generation infrastructure, and allow for the development of appropriate new technology.
   
2. Any emissions allowance allocation program, consistent with an economy-wide approach, should involve a reduction in the number of allowances allocated within the electricity sector over time to ensure that needed reductions in GHG emissions are encouraged through a gradual increase in the cost of carbon-intensive generation sources as compared to the cost of other generation sources.
   
3. The primary purpose of any transitional emissions allowance allocation process applicable to the electricity sector should be to minimize the initial economic impact of GHG-emissions regulation to end-user customers by phasing in the impact of such regulation over a reasonable period of time.
   
4. Any emissions allowance allocation program should produce reasonable outcomes, consistent with these cap-and-trade design principles, regardless of applicable electricity market or regulatory structures.
   
5. Any emissions allowance allocation program should assign all allocated allowances available to the electricity sector to local distribution companies providing a regulated local distribution function for end-user customers (including vertically-integrated utilities, distribution utilities, rural-electric cooperatives, municipal distribution systems, and all other entities providing distribution service directly to end-user customers subject to State regulation or its equivalent).  This approach will allow State PUCs or other authorities to ensure that the value of these no-cost allowances will inure to the benefit of end-use consumers.  Alternatively, States should be able to adopt other methods for distributing benefits to end-use consumers. 
   
6. The assignment of no-cost allocated allowances to local distribution companies as defined above should be based primarily on the level of GHG-emissions from the resources used to provide service to the local distribution company's load during an appropriate baseline period.
   
7. Any emissions allowance allocation program should not inappropriately advantage or disadvantage particular regions, local distribution companies (as defined above), or generators, and should ensure that end-user customers receive the benefit of allocated emissions allowances for the purpose of offsetting the increased costs resulting from the institution of GHG-emissions regulation.
   
8. Any assignment of allocated emissions allowances should seek to accommodate any efforts made in particular regions or States to reduce GHG-emissions in anticipation of the enactment of federal legislation regulating GHG-emissions. 
   
9. In defining the baseline period, proper precautions should be taken to ensure that counterproductive behavior by any allowance market participants is discouraged and that gaming does not occur.
   
10. Cost-containment measures should be included in any cap-and-trade mechanism in order to minimize abrupt changes in the cost of compliance, including during the initial phases of implementation, which could adversely affect electricity consumers or allowance markets.  Such measures should be designed to achieve effective and appropriate environmental benefits while ensuring price stability and predictability, promoting investment in appropriate technologies, and minimizing adverse consumer impacts, including price volatility; and be it further

RESOLVED, That any federal climate change legislation should be consistent with existing NARUC policies regarding non-discriminatory wholesale competition; demand response; energy efficiency; renewable generation; generation resource adequacy; fuel diversity; the development of clean coal and improved nuclear technologies; and the development of a comprehensive solution for the existing nuclear waste disposal problem.

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Sponsored by the Committees on Electricity, Energy Resources and the Environment, and Gas
Recommended by the NARUC Board of Directors, November13, 2007
Adopted by the Committee of the Whole, November __, 2007

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ERE-1 Resolution on State Regulatory Policies Toward Climate Change

WHEREAS, The National Association of Regulatory Utility Commissioners (NARUC) Resolution on Implications of Climate Policy for Ratepayers and Public Utilities (approved July 18, 2007) acknowledged the ongoing national debate over the desirability of limiting the emission of carbon dioxide and other greenhouse gases (GHG) and adopted certain policy principles that NARUC believes should be included in any federal legislation that attempts to regulate and reduce the level of such emissions; and

WHEREAS, Electric power generation is responsible for approximately 40 percent of U.S. emissions of carbon dioxide, the most common GHG; and

WHEREAS, The United Nations Intergovernmental Panel on Climate Change has concluded in its Fourth Assessment Report that "most of the observed increase in globally averaged temperatures since the mid-20th century is very likely due to the observed increase in anthropogenic greenhouse gas concentrations;" and

WHEREAS, There is growing support for State, regional, and federal actions to limit emissions of carbon dioxide and other GHGs; and

WHEREAS, The advocates of reducing the emission of carbon dioxide and other GHGs believe that the enactment of such legislation would provide substantial long-term environmental benefits and that a failure to address the impact of GHG emissions could, among other things, adversely affect the availability of water resources for hydroelectric generating facilities and cooling water for use in thermal generating facilities; and

WHEREAS, The advocates of reducing the emission of carbon dioxide and other GHGs believe that postponing action to reduce such emissions will increase the urgency of reducing emissions at a later time and increase the ultimate economic cost of actions taken to reduce such emissions; and

WHEREAS, Many U.S. financial and corporate interests, including many regulated utilities, have acknowledged that the enactment of federal legislation limiting the emission of carbon dioxide and other GHGs appears inevitable; and

WHEREAS, A broad coalition of multinational corporate and environmental leaders has formed the U.S. Climate Action Partnership in order to work collaboratively to address climate change issues; and

WHEREAS, Consistent with the States' traditional role as "laboratories of democracy," in which new and innovative approaches for meeting societal needs are developed at the State level, at least 18 States have taken action intended to limit carbon dioxide and other GHG emissions; and

WHEREAS, There is a substantial likelihood that federal legislation intended to reduce emissions of carbon dioxide and other GHGs (carbon regulation) will be enacted in the near future; and

WHEREAS, Assuming that such federal legislation will be enacted, State commissions should consider taking action to reduce the economic impact of compliance with such legislation; and

WHEREAS, The cost of compliance with carbon regulation may affect consumers differently depending upon a State's regulatory structure and the nature of the decisions made by State regulators; and

WHEREAS, The ultimate cost per ton of reducing carbon dioxide and other GHG emissions may vary dramatically depending on the State regulatory policy path chosen; and

WHEREAS, State utility regulators are well-positioned to evaluate carbon-related risks related to alternative resource options and to deliver economic benefits to their States through adoption of policies that appropriately account for and mitigate the risks arising from the likelihood that federal carbon regulation legislation will be enacted in the near future; now, therefore, be it

RESOLVED, The National Association of Regulatory Utility Commissioners, convened in its November 2007 Annual Convention in Anaheim, California, advocates that during the nation's likely transition to greater reliance upon lower-carbon resources for the generation of electric power, State regulators should consider adopting policy approaches and regulatory tools that ensure continued electric system reliability and minimize economic dislocation and costs to consumers; and be it further

RESOLVED, That State regulators should consider seeking to appropriately mitigate any risk of stranded utility investment, future cost increases, and reliability challenges resulting from the nation's likely transition to carbon regulation by requiring utilities to assess and incorporate carbon-related risks in their planning and decision making processes; and be it further

RESOLVED, That State regulators should consider addressing the nation's likely transition to carbon regulation through consideration of policy and regulatory options, such as:

• Facilitating greater reliance upon low- or no-carbon resources and technologies such as energy efficiency, high-efficiency combined heat and power, demand response, renewable generation, advanced nuclear, and emerging technologies (such as carbon capture and storage);
• Ensuring timely recovery of reasonable and prudently incurred costs associated with this transition;
• Requiring utilities to preserve system reliability while procuring resources in a manner that seeks to appropriately minimize the future cost of avoided carbon dioxide and other GHG emissions;
• Recognizing the costs and revenue streams associated with possible future emissions cap-and- trade mechanisms;
• Supporting broad-based funding for research to enable the use of thermal and other electric generating resources that result in environmentally acceptable electric generation;
• Supporting broad-based funding for research to enable the use of demand-side resources; and be it further  

RESOLVED, That NARUC urges State regulators to work collaboratively with State and local government entities, researchers and industries in considering the adoption of policies that appropriately promote cost-effective energy efficiency efforts and that give proper consideration to the benefits resulting from the use of cost-effective, low-or no-carbon technologies.

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Sponsored by the Committee on Energy Resources and the Environment
Recommended by the NARUC Board of Directors, November 13, 2007
Adopted by the Committee of the Whole, November___, 2007

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.