To my knowledge, Colorado is the only state in which regulators allow utilities to incorporate a carbon tax into the economic models used to make resource acquisition decisions (see here and here). Ratepayers can’t see it in their monthly bill, but the tax is used in the models, and the models dictate spending. It’s the worst kind of virtual reality: The carbon tax leaps from computers to ratepayer wallets.

The Colorado Public Utilities Commission was authorized to allow for a carbon tax in 2008 with the passage of HB 1164 by the General Assembly. The legislation was advertised as an essential component of former Governor’s Bill Ritter’s environmentalist “New Energy Economy,” but, in practice, the carbon tax has served as an accounting loophole through which Xcel Energy, the largest investor-owned utility in the State, has awarded itself big time profits. In a previous post, I explained in some detail how Xcel uses the carbon tax. Here are a few examples:

• One of Xcel’s priorities is winning market share from independent power producers on the wholesale electricity market. Older natural gas plants are Xcel’s fiercest competitors, because they have already paid off their capital costs, so they can bid electricity prices relatively low. The $20/ton carbon tax eliminates this advantage, because new plants are more efficient than older plants. It tilts the playing field to Xcel’s favor.

• In implementing HB 1365, the Clean Air Clean Jobs Act, 2010 legislation mandating fuel switching from coal to gas for almost 1,000 megawatts of electricity along the Front Range in Colorado, Xcel used the $20/ton carbon tax to obfuscate the price impact. The carbon tax inflated by scores of millions of dollars the baseline rate against which the costs of the law were calculated.

• On HB 1001, Colorado’s renewable electricity standard, Xcel employed the $20/ton carbon tax to circumvent the 2% rate cap that lawmakers had implemented to protect consumers. The effect of the carbon adder is to significantly expand Xcel’s annual expenditures, which increases the pool from which the company can reap profits.

A recent flip flop by Xcel demonstrates the company’s cynical manipulation of the carbon tax. As part of the 2007 Electric Resource Plan, Xcel committed to building a 250 megawatt concentrated solar power plant in the San Luis Valley in southern Colorado.  The commitment was finalized in late summer, 2009. Less than a year later, in June, 2010, Xcel petitioned the PUC for permission to abandon the solar plant.

Investor-owned utilities like Xcel play a delicate balancing act when it comes to capital expenditure. Generally speaking, the more Xcel spends, the more profit it makes, so it has an incentive to press for as much capital construction as possible. However, if the utility builds too much, and prices rise too fast, then it risks a backlash from the legislature, which could lead to the enactment of policies inimical to the utility. The 250 megawatts of concentrated solar power was so ridiculously expensive that Xcel realized it could upset this balance, and thereby risk blowback from the General Assembly.

Altering an Electric Resource Plan is no small matter. There are serious due process issues inherent to unilaterally changing a PUC-approved order. So Xcel needed a good reason for backing out of the solar deal. Specifically, it had to demonstrate that solar power is egregiously cost-ineffective relative to conventional power generation.

For accounting purposes, Xcel calculates the cost of renewable energy relative to natural gas generation. And in calculating the cost of natural gas, Xcel should be bound by the procedures established by Phase 1 of the 2007 Electric Resource Plan, which included, for the first time, the carbon tax. But that would have harmed Xcel’s argument, because the carbon tax would make gas much more expensive vis a vis a carbon free energy source, like concentrated solar power. So Xcel dropped the carbon tax. Here’s how Xcel’s Kurtis J Haeger, Managing Director of Wholesale Operations, justified Xcel’s decision in April 14, 2011, testimony before the PUC.

“We attempted to use the approved resource planning methodologies and factors from the last resource plan as we are directed to do…and in this case, the assumption used in the ’07 Resource Plan was for a carbon tax or carbon proxy to go into effect in 2010. Sitting in 2011, I know that didn’t happen…We updated the assumptions because the carbon assumption we had in the original modeling was not valid anymore.” [Transcript from April 14 PUC hearing, p 19 lines 19-21, 25; p 20 lines 1-4, 12-14]

This rationalization is bogus. It’s been apparent that the Congress won’t put a price on carbon since the fall of 2009, when the Senate shelved a cap-and-trade scheme that had been enacted by the House the previous summer (the legislation was the American Clean Energy and Security Act), yet this didn’t stop Xcel from using the carbon tax in its models.

Fattened profits are a much more plausible reason for Xcel to suddenly flip-flop on the carbon tax. Quite simply, when use of the carbon tax benefited Xcel, the utility wanted to use it. And now that the carbon tax no longer benefits Xcel, the utility doesn’t want to use it.

I travelled to Denver twice in the last 7 days to testify before the Senate State Affairs Committee on HB 1291, Colorado’s State Implementation Plan to meet the Regional Haze provision of the federal Clean Air Act.

I told the Committee that HB 1291 is illegal. And I rebutted the distortions peddled by its proponents, who also testified. Illegality and disingenuousness are huge accusations, and I made them twice, in testimonies a week apart, so the bill’s proponents had time to conjure a response. But no one disputed my assertions. Because they were true.

Nonetheless, the Plan passed out of Committee, due to the fact that it enjoys the support of two of Colorado’s richest special interests, for which billions of dollars were at stake. Today, HB 1291 was enacted by the full Senate, by a 25-10 vote. Two weeks ago, by a 58-7 vote, it was passed by the House of Representatives. If there’s one thing a bipartisan, bicameral majority can agree on these days, it’s the importance of currying favor with the deepest pockets.

This is a long blog about the who, what, why, and when of Colorado’s Regional Haze State Implementation Plan, the most outrageous rip-off you’ve never heard of.

The Back Story

Colorado’s Regional Haze State Implementation Plan originated not in the Centennial  State, but in Oklahoma.  It owes its form to Aubrey McClendon, CEO of Chesapeake Energy, a natural gas company headquartered in Oklahoma City.

McClendon is very open about his pursuit of government policies that make people use more of the product he produces. Among the many pro-gas, anti-market policies he supports, are: forcing cars to use gas; blocking the construction of coal plants; and advocating for climate change policies to spur fuel switching from coal to gas for electricity generation.

It was the latter pitch he made to former Colorado Governor Bill Ritter. Ritter aggressively advertised himself as an environmentalist energy policymaker, so he was the perfect mark for McClendon. In July 2009, gas industry representatives, led by Chesapeake Energy, gave a presentation to Governor Ritter explaining how fuel switching from coal to natural gas was the only way that the Governor could reach his greenhouse gas emissions reduction goals established by his “Colorado Climate Action Plan.”

When the gas industry put together its power point presentation for Governor Ritter, a cap-and-trade scheme was making its way through the House of Representatives, and “doing something” about climate change seemed to be politically viable. It wasn’t. The House enacted cap-and-trade legislation in June, just before the July recess. For the rest of the summer, the big political story was the overwhelming public anger directed at sitting Members of Congress during so-called “town hall” meetings. And, in many jurisdictions, the anger was driven in large part by the House’s passage of an energy rationing scheme.

Clearly, “doing something” about climate change was politically dangerous. The upshot is that the Ritter and McClendon needed a better reason for fuel switching if they were going to sell it successfully to Colorado voters.

So they tacked. Instead of climate change, they changed the impetus for fuel switching from climate change to Big Brother.  They claimed that President Obama was waging a war on coal, and that a raft of federal air quality regulations was in the pipeline, and, finally, that the cheapest fashion to comply with this coal crackdown was to switch fuels from coal to natural gas.

To be sure, Obama’s EPA is waging a war on coal (I’ve written about this subject extensively; see here, here, here, and here). However, it is also true that Colorado’s coal powered plants, for the most part, already are equipped with top-of-the-line pollution controls. As such, Colorado’s coal power fleet was well positioned to endure the EPA’s regulatory assault, and remain a source of affordable electricity. That is, fuel switching was an unnecessary and expensive policy to achieve compliance with pending federal air quality regulations.

But the facts didn’t matter, because Ritter wanted his climate kudos and the gas guys wanted fuel switching. To get Xcel Energy (the largest utility in the state) on board, they offered super-generous cost recovery treatment in exchange for participation, including a guaranteed 10.5 percent return on investment and, more importantly, upfront payment (normally, utilities have to wait until an asset is “used and useful” before they can recover costs). In light of the huge capital costs entailed in fuel switching (Xcel gets to recover the cost of the remaining life of the coal plant, the cost of dismantling the plant, and the cost of building new gas plants), Xcel stood to reap at least $130 million in fuel switching profits through 2020.

During the winter of 2009/2010, the “winners” of fuel switching (Xcel, the gas industry, Governor Bill Ritter, and environmentalist non-profits) hammered out the text of a fuel switching bill. The “losers” (the coal industry, ratepayers, and independent power producers) were left out of the negotiations. Indeed, they weren’t even aware of the negotiations until the legislation, ironically titled the “Clean Air Clean Jobs Act,” was finished. The law was enacted in April, 2010.

Perhaps you are wondering: How does this relate to Regional Haze? Well, as I noted above, fuel switching in Colorado was justified as an affordable response to Obama’s war on coal. To be specific, the Clean Air Clean Jobs Act authorized favorable rate treatment for Xcel if the utility met “reasonably foreseeable” federal air quality regulations with a “cost-effective” plan that could include fuel switching. In practice, these “reasonably foreseeable” regulations were defined as Regional Haze and a revised Ozone National Ambient Air Quality Standards, although the former took precedence over the latter. According to Karen Hyde, Xcel Energy’s Vice President for Regulatory Affairs, Regional Haze “precipitated” the Clean Air Clean Jobs Act. As a result, the fuel switching implementation plan was a component of the Regional Haze State Implementation Plan.

[For a primer on the Regional Haze provision of the Clean Air Act, click here.]

Xcel Overreaches

As is explained in this policy paper, the impetus for fuel switching—a federal coal crackdown—was grossly exaggerated. Proponents claimed that there were 11 regulations in the pipeline; in fact, there were two (as noted above, these two regulations were Regional Haze and Ozone). And they could have been met with emissions controls far more cost-effective than tearing down coal plants and building new gas plants. But Colorado lawmakers bought the ruse, or at least they pretended to, and enacted the Clean Air Clean Jobs Act.

It was all well and legal…until the rent seekers made a big mistake. Xcel got greedy. As I noted above, Xcel’s “carrot” to fuel switch was generous cost-recovery treatment, so the utility had a big incentive to cram as much into the fuel switching plan as they could. In this avaricious spirit, Xcel sought to incorporate into the fuel switching plan the cost of controls at plants that were not subject to “reasonably foreseeable” federal air quality requirements, and, therefore, not subject to the Clean Air Clean Jobs Act.

Like other power plants included in the Clean Air Clean Jobs Act plan, the Hayden 1 and 2 coal power plants in Routt County near Steamboat Springs in northern Colorado are subject to Regional Haze regulations. Unlike the other power plants incorporated into the fuel switching plan, Hayden 1 and 2 are not subject to pending Ozone regulations for existing coal fired power plants, because they are not located in Colorado’s ozone non-attainment area. As such, they were not subject to the “reasonably foreseeable” federal air quality regulations stipulated in the Clean Air Clean Jobs Act, and, therefore, should not have been included in the fuel switching plan.

To make matters worse, Xcel could have achieved compliance with Regional Haze for Hayden 1 and 2 with emissions controls that cost roughly $20 million, but it instead pressed for controls that cost $140 million. Its reasoning was simple: The more costs it could cram into the fuel switching plan, the more profit it made. According to the Public Utilities Commission staff, “It…appears that the only reason [Xcel] has included these units [Hayden 1 and 2] in its plan is to be able to receive the special rate recovery treatment provided by the [Clean Air Clean Jobs] Act.”

Xcel’s proposed emissions controls for Hayden 1 and 2 far exceeded what the federal government requires to comply with Regional Haze. That’s a problem, because it is illegal in Colorado for a state implementation plan pursuant to the Clean Air Act (like the Regional Haze State Implementation Plan) to include emissions controls that are more stringent than what the federal government requires. To paraphrase the General Assembly’s Legislative Council, the federal “floor” for emissions controls is the state “ceiling.” As I explain in detail here, Xcel’s proposed Regional Haze controls for Hayden 1 and 2 clearly violate this statutory prohibition, and are therefore illegal.

Despite this conspicuous contradiction with Colorado statute, on November 18, 2010, the Colorado Air Quality Control Commission approved Xcel’s ultra-expensive emissions controls at Hayden 1 and 2 as part of the Regional Haze State Implementation Plan. Notably (or disconcertingly), the legality of the controls was never addressed during the Air Quality Control Commission’s deliberations.

On December 9, 2010, the Public Utilities Commission approved these Hayden controls as part of the Clean Air Clean Jobs Act implementation plan. It then sent this plan to the Air Quality Control Commission for incorporation into the final Regional Haze State Implementation Plan. On January 11, 2011, the Air Quality Control Commission approved the Regional Haze State Implementation Plan, and submitted it to the General Assembly for final approval.

Battle in the General Assembly

The Regional Haze State Implementation Plan was introduced as HB 1291, and it quickly passed the House of Representatives by a 58-7 vote. The vote was overwhelming because the legislation was the number one priority of two of Colorado’s most influential special interests. In effect, HB 1291 was the final step of the Clean Air Clean Jobs Act, so a lot was on the line, and its proponents pressed as hard as they could. The “magnificent” seven lawmakers who voted against HB 1291 deserve a lot of credit for political courage.

The wonderfully principled State Senator Kevin Lundberg also deserves much credit for standing up to Colorado’s biggest special interests. He was outraged by the evident illegality and cost-ineffectiveness of the Regional Haze State Implementation Plan, and he sponsored legislation that would strip it of the Hayden 1 and 2 emissions controls. That legislation was S 237.

And this point, things got a little scandalous. On April 11, the Senate referred HB 1291 and S 237 to the State Affairs Committee, and a hearing on both bills was scheduled for April 25. Despite the fact that HB 1291 enjoyed the support of Colorado’s most influential special interests (gas and Excel) and was therefore almost assuredly going to pass by a wide margin, its proponents decided to leave nothing to chance. On April 12, the State, Veterans, and Military Affairs Committee moved the hearing on HB 1291 up to April 19, but it left consideration of S 237 on April 25. But if the Senate approves the Regional Haze State Implementation Plan by enacting HB 1291 on April 19, then there is no reason to consider changes to that Plan (i.e., S 237) a week later. Senate leadership was trying to silence the opposition!

Senator Lundberg fought these shenanigans, and managed to delay a final vote on HB 1291 until S 237 could be considered. At the Senator’s request, I testified at both the April 19 hearing (on HB 1291) and the April 25 hearing (on S 237), along with Carol Kirkstadt and the Independence Institute’s Amy Oliver Cooke.

Video of my HB 1291 testimony is available here; the S 237 testimony is available here (I start at the 6:00 minute mark, and I have rebuttal testimony at 34:50). They were similar testionies. In each case, I dropped a big matzo ball: I told the Senate State Affairs Committee that the law they were considering is an illegal rip off.

To be sure, that’s a big accusation, one that I don’t make lightly. An Attorney General representative testified at both hearings. So did an Air Quality Control Commission rep. So did Xcel’s VP for Regulatory Affairs and its top environmental officer. So did a Chesapeake Energy attorney representing the gas industry. Surely, if my reasoning was flawed, then they would have corrected it, right? No one rebutted my arguments.

Instead, I rebutted theirs.

All of the fuel switching proponents claimed that the EPA would usurp Colorado’s air quality planning if HB 1291 wasn’t enacted untouched. As I told the Committee, this is the same bogus Big Brother reasoning that galvanized the Clean Air Clean Jobs Act. It was wrong then, and it’s wrong now. If the Hayden controls were stripped from the State Implementation Plan, then Colorado would submit a “conditional” plan (i.e., one without the Hayden 1 and 2 controls), while the Hayden 1 and 2 Regional Haze determinations would be remanded to the Air Quality Control Commission. Thus would begin a process of negotiation. In all likelihood, the Environmental Protection Agency would accept the “conditional” Regional Haze State Implementation Plan (after all, it calls for total emissions reductions far in excess of what is required, due to the incorporation of the fuel switching plan), and then wait to consider the Hayden 1 and 2 emissions controls. The idea that the EPA would swoop in overnight and start kicking ass and taking names simply does not comport with the reality of environmental federalism in the US. As I noted in the hearings, it is akin to saying that the bank will foreclose on your home because you missed a credit card payment.

The gas industry counsel and the Attorney General representative both intimated that Hayden 1 and 2 were subject to the Clean Air Clean Jobs Act, and, therefore, exempt from Colorado’s statutory prohibition on emissions controls pursuant to the Clean Air Act that exceed federal requirements. This was a misrepresentation, and I told that to the Committee. As I explain above, the Hayden 1 and 2 power plants are not in Colorado’s ozone non-attainment zone, so they are not subject to the more stringent ozone regulations under consideration by the Obama administration. As such, they are not subject to the Clean Air Clean Jobs Act. Undoubtedly, the lawyers were aware of this fact, which means they were being disingenuous.

Xcel’s top environmental officer actually told the Committee that the EPA, in disapproving Colorado’s 2008 Regional Haze State Implementation Plan, had “closed the door” on anything but the most expensive emissions controls at Hayden 1 and 2, the ones Xcel had chosen. This was a lie, as I told the Senate in rebuttal testimony. I backed this assertion by providing to the Committee the EPA’s disapproval letter, which I had brought with me. In fact, the rejection was due primarily to a procedural matter (the Air Quality Control Commission had failed to identify all technologically feasible emissions controls, as is required by the Regional Haze provision of the Clean Air Act), and had nothing to do with the Hayden 1 and 2 controls.

Thus, I presented a case that HB 1291 was almost assuredly illegal, and I also exposed the pack of distortions that served as the legislation’s justification. Of course, the ugly truth stood no chance vis a vis the promise of campaign lucre from rent seekers. By a 3 to 2 vote, the State Affairs Committee passed HB 1291 and rejected S 237.

So what is next? In the immediate future, HB 1291 will be sent to the Governor for his signature. There’s no reason to expect that Governor Hickenlooper won’t approve the legislation. But it’s not necessarily over after that. HB 1291 almost certainly violates existing Colorado statute, but this matter was never vetted by regulatory agencies or the General Assembly. As such, the law is ripe for legal challenge from Xcel ratepayers.

Maryland

Offshore wind energy is so expensive that even the Democratic-controlled State Legislature is balking at the price tag of Maryland Governor Martin O’Malley’s (D) proposed “Maryland Offshore Wind Energy Act.” The legislation would force the state’s investor owned utilities to minimum 20-year contracts for 400 megawatts to 600 megawatts of offshore wind power. Governor O’Malley’s office estimates that the legislation would cost ratepayers about $1.50 a month, but this projection is based on unrealistically optimistic assumptions. Independent analyses peg the costs at up to $9.00 a month. The disparity in estimates has elicited a negative response from O’Malley’s own party in the legislature: the Washington Post reported this week that two Democratic lawmakers key to the bill’s prospects have suggested they need more time to vet the legislation than is left in this year’s session.

Kentucky

By a bipartisan vote of 28 to 10, the Kentucky State Senate last week passed a resolution exempting the coal industry from EPA regulation, according to the AP. The non-binding resolution, which was introduced by Sen. Brandon Smith (R), is now before the House of Representatives.

Colorado

The Colorado Public Utilities Commission held hearings last Friday on Xcel Energy’s request to lower its “Solar*Rewards” subsidy for installations of photovoltaic panels. This year, Xcel ratepayers are projected to pay 4 percent of total sales (about $100 million) on Solar*Rewards subsidies that will result in .3 percent of generating capacity. The Colorado Solar Energy Industry Association claims that the loss of the subsidy would cause a 75 percent contraction in the state’s solar industry.