News + Events
House Passes Energy Bill with Climate Language
July 1, 2009
Peter S. Glaser
Bonnie A. Suchman
On Friday, June 26, 2009, the U.S. House of Representatives passed a comprehensive energy bill that contains the first-ever nation-wide mandatory greenhouse gas “cap and trade” program. Formally entitled the “American Clean Energy and Security Act of 2009,” the bill is more commonly referred to as the “Waxman-Markey Bill” after the bill’s cosponsors – House Energy and Commerce Committee Chairman Henry Waxman (D-Cal.) and Rep. Ed Markey (D-Mass.). The bill represents a victory for those seeking the regulation of greenhouse gases at the national level.
At final passage, the bill had reached approximately 1,500 pages in length after having been amended almost continuously during its trip to the floor of the House and in negotiations that took place up until the bill was actually passed. Several measures were modified, or in some cases significantly rewritten, during the days preceding the actual vote last Friday, with a 300+ page Manager’s Amendment filed at about 3:00 A.M. on the morning of the vote. The bill was approved by a narrow margin of 219 to 212 Friday evening, with 44 Democrats voting against the bill and 8 Republicans voting for it.
The Waxman-Markey Bill is broad in scope, and covers multiple topics, including carbon capture and sequestration, clean transportation, smart grid advancement, nuclear and advanced technologies, and energy efficiency. This advisory focuses on three key provisions relevant to the electric utility industry: climate change, renewable electricity standard, and transmission planning and siting.
Climate Change Language
Generally, the bill establishes a cap and trade program for industrial sources emitting at least 25,000 tons per year of CO2-equivalent and covering about 85% of total U.S. emissions. The program mandates a 3% reduction in greenhouse gas emissions from capped sources below 2005 levels when the program starts in 2012, a 17% reduction below 2005 levels by 2020, and an 83% reduction below 2005 levels by 2050. The program would require capped sources to hold a sufficient number of allowances to cover their greenhouse gas emissions. Although a significant portion of the allowances will be allocated at no cost to these sources, the rest will be auctioned off to raise money for other clean energy programs. The percentage of allowances allocated freely instead of auctioned off will decline steadily until 2030, after which time all allowances will be distributed via auction. For instance, for electric utility sources, 43.75% of the allowances would be allocated at no-cost to this sector in 2012 and 2013, and that number would decline over time to 7% in 2029 and then none thereafter.
In a measure designed to reduce the cost of compliance, the bill contains an extensive provision that would allow capped sources to substitute offsets for allowances. In general, about 25-30% of the total allowance obligation can be met with offsets in the early years of the program, with that percentage increasing over time. Generally, international offsets can supply up to 50% of all of the offsets, although, except in the initial years of the program, 1.25 international offsets will be required for every one domestic offset.
Two of the key issues that were resolved in the final days of consideration pertained to agriculture and international competitiveness. On agriculture, Colin Peterson, Chair of the House Agriculture Committee, succeeded in convincing the bill’s sponsors to make the Department of Agriculture responsible for administering agricultural offsets rather than the Environmental Protection Agency. He also won approval of an amendment that would suspend requirements that determinations of the greenhouse gas intensity of ethanol must take into consideration the effect increased usage of domestic crops for ethanol production may have on land-use in other countries, where reduced U.S. crop exports might cause these other countries to clear ecologically sensitive land to grow crops.
On international competitiveness, the bill includes a provision for industries that are greenhouse gas intensive and that is sensitive to international competition. The bill contains a mechanism under which such industries could receive extra allowances to mitigate the effects of such competition and under which countries that do not adopt comparable greenhouse gas reduction policies could be required to purchase U.S. allowances to import their products into this country. In a statement over the weekend, President Obama indicated that he opposed the international competitiveness provision and would seek to change it in any legislation ultimately adopted.
The bill also generally exempts sources that are subject to the cap and trade program from regulation of their greenhouse gas emissions under the Clean Air Act. New coal-fired electric generating units, however, would be required to meet certain greenhouse gas performance standards. Additionally, EPA is directed to undertake rulemakings establishing performance standards for sources that are significant greenhouse gas emitters and that are not subject to the cap and trade program. The threat of EPA regulation of greenhouse gases under the Clean Air Act if Congress does not enact comprehensive climate change legislation loomed large in the House debate and will continue to be a significant factor as the debate moves to the Senate.
Significant debate has occurred with respect to the total cost of the program and the impact it may have on American consumers. In a Congressional Budget Office study released just prior to the passage of the bill, the total cost of the program in 2020 was expected to be $22 billion, or $175 per household per year. However, without some of the cost-saving measures inserted into the bill, the study concluded that the program could cost as much as $110 billion in 2020, or $890 per household. The study only included direct costs to households and did not include the cost in reduced GDP. Republicans and industry groups have disagreed with these calculations, suggesting that the total cost per household will actually be $3,300 or higher once the expected increases in electricity utility rates are fully represented.
Renewable Electricity Standard
The House language would impose an obligation on retail electric suppliers to hold renewable energy credits and demonstrated annual electricity savings equal to the required annual percentage, beginning at 6% for 2012 and rising to 20% for 2020 through 2039, multiplied by the retail electric supplier’s base amount. Each retail electric supplier must submit Federal renewable electricity credits equal to at least three quarters of the retail electric supplier’s annual combined target, except that FERC can change the proportion to two fifths to be met by demonstrated total annual electricity savings upon a petition by the state.
The retail electric supplier’s base amount means the total amount of electric energy sold, excluding electricity generated by a hydroelectric facility that is not qualified hydropower, electricity generated by a nuclear generator placed in service after the date of enactment, and the proportion of electricity generated by a fossil-fueled generating unit that is equal to the proportion of greenhouse gases produced that are captured and sequestered. Renewable electricity is defined as electricity generated by a renewable energy resource (wind, solar, geothermal, renewable biomass, biogas and biofuels derived from renewable biomass, qualified hydropower, and marine and hydrokinetic) or other qualifying energy resources. Other qualifying energy resources is defined to mean landfill gas, wastewater treatment gas, coal mine methane used to generate electricity at or near the mine mouth, and qualified waste-to-energy. Electricity savings means reductions in electricity consumption, including customer facility savings (which includes recycled energy savings), combined heat and power savings and fuel cell savings. A retail electric supplier may satisfy the requirements of the section in whole or part by submitting a payment equal to $25, adjusted for inflation, in lieu of each Federal renewable electricity credit or megawatt hour of demonstrated total annual electricity savings.
Several changes were made to the RES language between House Energy and Commerce Committee passage and the floor debates. First, modifications were made to accommodate States with preexisting renewable electricity standards that rely on a central procurement model for deploying renewable electricity. Second, an amendment expands the definition of “qualified hydropower” by changing the eligibility date for incremental hydropower from January 1, 1992 to January 1, 1988. Finally, language was added to broaden the definition of “renewable biomass.”
Transmission Planning and Siting
The House language that passed the House Energy and Commerce Committee had included only transmission planning language. Following a subsequent hearing on whether additional federal transmission siting authority is necessary, Representative Ed Markey announced his skepticism about the need for such language. Nevertheless, Representatives Jay Inslee and Betsy Markey continued to push for inclusion of some additional authority, and language was ultimately agreed to that does provide FERC with some additional authority, although such authority is limited to certain high-priority interstate transmission lines in the Western Interconnection.
The transmission planning language provides for the development of regional plans. Regional planning entities are encouraged to incorporate into their planning processes national electricity grid planning principles adopted by FERC and to coordinate across regions and to harmonize regional electric grid planning. Regional planning entities are required to submit the plans to the Commission not later than 18 months after the date FERC promulgates national electricity grid planning principles.
The new siting language provides FERC with enhanced siting authority, but only with respect to transmission projects in the Western Interconnection. FERC may exercise such siting authority only where a proposed transmission facility was included in the regional transmission plans discussed above; any conflict among grid plans concerning the need for the facility has been resolved; the facility is multistate; and the developer of such facility has filed an application with a state commission and that commission has either denied the application, failed to issue a decision within one year, or imposed unreasonable conditions. In issuing a certification, FERC shall consider and incorporate any siting constraints and mitigation measures identified by relevant State or local authorities, unless not feasible. And for purposes of Federal authorizations for such transmission facilities, FERC shall act as the lead agency for purposes of coordinating all applicable Federal authorizations and related environmental review of the facility. However, if the facility is proposed to be sited on Federal lands, the Department of the Interior will assume such lead-agency duties as agreed between FERC and Interior.
The new language amends the current Energy Policy Act language such that the existing National Interest Electric Transmission Corridors language would apply only to States in the Eastern Interconnection. However, the new language clarifies that such Federal backstop siting authority in the East only applies to interstate transmission lines and an intrastate segment integral to a proposed interstate facility.
Outlook
With the passage of the bill in the House, the debate now moves to Senate, where Democratic leaders must generate enough support to reach the 60-vote threshold needed to defeat a filibuster. Senate Majority Leader Harry Reid has set a September 18, 2009 deadline for the six committees with jurisdiction to complete their review of a counterpart bill and release it for a vote.