Bloomberg News

Obama Divides Power Players With Rule Utilities Accept

May 22, 2014

Obama Divides Power Players With Climate Rule Utilities Accept

Steam from cooling towers at Exelon Corp.'s nuclear plant in Byron, Illinois, in this March 16, 2011 file photo. Photographer: Robert Ray/AP Photo

The Obama administration’s upcoming greenhouse gas rules are gaining acceptance from an unlikely quarter -- power companies -- and splitting the energy industry’s normally unified opposition to new limits.

The proposed regulations set for release on June 2 would mandate deep cuts in greenhouse-gas pollution while allowing smokestack emissions to be offset with enhancements elsewhere in the system, according to people familiar with the plan.

Power company executives, while cautioning that they aren’t privy to the plan’s details, greet the Environmental Protection Agency’s promise of a flexible approach with sentiments ranging from eager endorsement to grudging acceptance.

“Our goal is to work with EPA to make sure the rule works,” said Joe Dominguez, senior vice president of Exelon Corp. (EXC:US) “There needs to be a pathway towards meaningful reductions.”

For some power companies, the rules will help save nuclear reactors or boost investments in wind farms. Nuclear reactors emit few greenhouse gases, and companies with a fleet of reactors, such as Entergy Corp. (ETR:US) and Exelon, may benefit from a rule to cut carbon.

“We see a potential upside,” said Chuck Barlow, vice president of environmental strategy and policy for Entergy, which owns coal, natural gas and nuclear power plants, including the Indian Point facility north of New York City. “It would be an opportunity for our nuclear facilities.”

Coal War

That view isn’t shared by lobbyists for coal producers such as Peabody Energy Corp. (BTU:US) who call the EPA plan the latest salvo in a “war on coal” that would result in lost jobs and less reliable energy.

The willingness of power companies to embrace the agency effort could cleave the business lobby and give President Barack Obama a chance to rally support. Eventually, states will need to implement whatever the EPA proposes, and utilities could help head off coal producers and get state leaders to engage in the effort, supporters say.

Exelon chief executive Chris Crane said the rules will give his company a chance to go to state regulators and talk about how its nuclear fleet, which is suffering because of low electricity prices, could thrive.

“It will be in the states where these kinds of decisions are made,” he told reporters in Washington this month.

‘Do Fine’

Xcel Energy Inc. (XEL:US) has about half of its capacity in coal, followed closely by natural gas. Still, if the EPA gives credit for early action and sets reasonable targets, “we are confident we will do fine under the rule,” Frank Prager, Xcel’s vice president for policy and strategy, said in an interview.

To be sure, the views of companies with extensive investments in nuclear power aren’t embraced by all companies, and the final rules may still draw political and legal challenges from some in the industry. The views of Entergy and Exelon are neither unlikely nor surprising, said Frank Maisano, a spokesman for the Electric Reliability Coordinating Council, a group of coal-heavy companies.

Heather Zichal, a former top White House official for energy and environment, said the industry is making calculations ahead of the rules being issued.

Leeway Granted

“There is a very practical conversation happening, but that’s not to say everybody is going to end up in the same place,” Zichal said.

The EPA’s approach would mandate 25 percent cuts, while giving states broad leeway in how to reduce emissions and endorsing a path that goes “beyond the fence line” of specific plants, according to people familiar with the plan. The agency is contemplating a long phase-in for the steepest cuts, and the proposal will include as many questions as answers for utilities and state officials, the people said.

What year the administration will choose as the baseline isn’t clear and could be a significant matter of dispute.

Power plants release more than 2 billion tons of carbon dioxide in the U.S. a year, accounting for more than 40 percent of such emissions. Coal plants account for three-quarters of that total.

“There are a number of generators that are in a different position than the coal industry,” Sue Tierney, senior adviser to the Analysis Group in Boston who wrote a report about complying with the rules, said in an interview. Because demand for electricity has been largely flat, “there is a lot of underutilized, relatively clean generating capacity.”

Declining Emissions

Greenhouse-gas emissions from power plants, the largest source, dropped 16 percent from 2005 to 2012, according to EPA data.

“Peabody supports technology advancement and continuous emissions improvement, while opposing proposed rules that would punish electricity consumers and act outside of the bounds of the law,” said Beth Sutton, a spokeswoman for Peabody.

Lobbyists for coal producers such as Peabody and related companies met in private with administration officials last week to warn against taking a broad approach, and said the EPA’s plan could result in an over-reliance on natural gas, according to a presentation prepared for the meeting and provided to Bloomberg.

Shuttering Plants

The group outlined the impact of a plan that would mandate a 6 percent cut in emissions by 2020, and 25 percent cut by 2030 from a 2013 baseline. That could reduce coal use by 46 percent. Overall, cuts of that magnitude could mean the premature closing of an additional 40 gigawatts to 80 gigawatts of coal-fired power generation and cost consumers up to $17 billion a year, the American Coalition for Clean Coal Electricity said in that meeting, according to the presentation.

“This whole rulemaking process is flawed, beginning with the fact that the Clean Air Act was never intended to be used to regulate carbon emissions from power plants,” said Laura Sheehan, the group’s spokeswoman.

Environmental groups are pushing for steep cuts. The Natural Resources Defense Council says the EPA’s rules could be set up achieve a 30 percent reduction by 2020 if the agency allows efficiency gains and renewables to offset cuts in coal use. The Clean Air Task Force, a separate environmental group, has a different plan that could achieve similar reductions by running natural gas plants more.

Fuel Mix

Power companies’ view of climate rules depends on the mix of fuels they use to generate electricity. Burning coal to generate electricity produces twice as much carbon dioxide as natural gas, and so requirements that help owners of natural-gas plants may hurt coal-dependent companies.

“The concern is that the potential regulation would eliminate coal as a source for generation and would also have an impact on natural gas,” said George Lewis, a spokesman for PPL Corp. (PPL:US), an Allentown, Pennsylvania, company that owns about 12,000 megawatts of coal-fired power plants. PPL wants flexibility in the rules, he said.

And representatives of local power suppliers, which can be more dependent on one plant and have less of an ability to swap one fuel for another, say the EPA rules are a poor way to handle changing regulation of the power sector.

“These are complicated markets; EPA has limited tools and we can’t just assume this will all work out in the end,” said Cliff Hamal, a consultant hired by the American Public Power Association to analyze the approach. The conclusions were Hamal’s, not the group’s.

Shape Rules

Companies such as American Electric Power Co. (AEP:US) and Southern Co. (SO:US) say they want to help shape the rules, not prevent them. Both companies’ emissions are down more than 20 percent since 2005, as they have agreed to shutter old coal plants and are burning more natural gas. Each company says the rules should account for those reductions and give states flexibility.

AEP also wants to be sure its coal plants won’t be prematurely retired after the company invested hundreds of millions of dollars to meet separate EPA rules on mercury pollution.

They “should not force the premature shutdown of existing, well-controlled coal-fueled power plants,” AEP said in comments sent to the EPA outlining what it is seeking.

“Southern Company is committed to playing a leadership role in finding solutions that make technological, environmental and economic sense,” Tim Leljedal, a company spokesman, said in an e-mail.

McCarthy Role

Former administration officials say one reason power companies and utilities are taking a constructive approach is their long history with the person charged with drafting them: EPA Administrator Gina McCarthy.

As EPA’s top air regulator, McCarthy rejiggered the agency’s rule for mercury emissions from coal plants before it was released to account for specific requests from Southern and AEP. Just this week the agency released rules on fish kills at the water intakes used by nuclear and coal plants, rules that were deemed reasonable by industry and an abdication by environmentalists.

Zichal said: “They have a history of working through tough rules together with Gina and they know that at the end of the day, not everybody gets everything they want, but they get what they need.”

(An earlier version of this story corrected the estimated magnitude of coal-plant closings to gigawatts.)

To contact the reporters on this story: Mark Drajem in Washington at mdrajem@bloomberg.net; Mark Chediak in San Francisco at mchediak@bloomberg.net

To contact the editors responsible for this story: Jon Morgan at jmorgan97@bloomberg.net Steve Geimann


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