Coal Generators Face Opposition on Credits

By REBECCA SMITH

State utility regulators and consumer advocates are urging Congress to eliminate a provision in the pending climate-change bill that gives free emission allowances to certain companies that burn coal to make electricity.
The Waxman-Markey bill, which cleared a key House committee Thursday, would give as much as 5% of initial credits to merchant coal generators and 30% to electric utilities when a cap-and-trade program is scheduled to begin in 2012. Unlike utilities, whose prices are controlled, merchant coal generators sell electricity to other companies at market prices.
Utilities are expected to use their credits to cover their own emissions, or sell the credits and use the money to hold down consumer energy costs, which are expected to rise as a result of the legislation. But there's no guarantee unregulated coal generators would use their credits to reduce electricity prices, which would ultimately benefit consumers. They could take the credits and not reduce their prices.
Under a cap-and-trade program, companies that produce greenhouse gases would be given credits covering a portion of their emissions. If some companies produce less than their "cap," they could "trade" their credits with others.
In the past few days, state regulators have urged bill authors Reps. Henry Waxman (D., Calif.) and Edward Markey (D., Mass.) to redirect to utilities all of the credits earmarked for merchant coal generators. The National Association of Regulatory Utility Commissioners, in a letter, wrote the congressmen that giving credits to the coal generators "will only lead to windfall profits for a particular sector of the electricity industry at the expense of end-use customers."
Other groups, including those that represent consumer advocates and public-power utilities, also oppose the allocation method laid out in the House bill, HB 2454. "Our concern is that market prices will rise anyway, and consumers won't get the benefit of the allowances given coal generators," said David Springe, consumer counsel of the Citizens' Utility Ratepayer Board in Topeka, Kan., and president of the National Association of State Utility Consumer Advocates.
Generators disagree that credits could result in windfall profits. The credits will cover only half the emissions they are expected to produce by generating electricity with coal, and they will likely have to buy the other half of the credits they need.
Dynegy Inc., NRG Energy Inc. and Edison International are among the companies that would receive credits, because they own coal-fired power plants that sell electricity at market prices. These merchant generators face more financial risks than utilities, because they aren't regulated monopolies, and they're allowed to earn higher profits than utilities.
Approximately one-quarter of the nation's coal-fired generating capacity is owned by merchant generators. Many power plants changed hands when states deregulated their retail electricity markets and utilities divested themselves of their generation fleets.
Ted Craver, chief executive of Edison, based in Rosemead, Calif., said that generators need free credits or some may be forced "to shut down, which creates reliability issues."
His company owns 7,400 megawatts of coal-fired generation in the Midwest. Coal-based generators face billions of dollars in costs from pollution-control upgrades that will be required in coming years. Generators need clarity about carbon costs, said Mr. Craver, so they will know which plants are worth upgrading.
Some coal generators are experiencing hard times, because low natural-gas prices are allowing gas generators to seize market share from coal generators. In March, the most recent month for which federal data were available, production from gas-fired plants increased 4.5%, while production at coal-fired plants fell 16.1% versus March 2008. Consumption slipped 3.9% from a year earlier.
Merchant coal generators were in better shape a few years ago when natural gas prices were high. At the time, they were able to sell electricity in deregulated markets at high prices set by gas units, even though their costs were low. Now, profit margins are compressed and costs of complying with pollution-control requirements are rising.
Write to Rebecca Smith at rebecca.smith@wsj.com