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In a restructured electric utility system, state regulators will have less control over activities that have an impact on the environment. Yet observers disagree over the ultimate significance of this. Seven different issues have emerged in the policy debate over restructuring: Is dirty cheaper? Optimists hope that increased competition will favor new generating technologies that will generally be both cheaper and cleaner than those currently in use. In particular, the U.S. Department of Energy predicts that comparatively clean, combined-cycle natural gas plants will generate power at 3.10 cents per kWh in 2005, compared with 4.03 cents per kWh for conventional pulverized-coal plants, and that natural gas will fuel 85 percent of the 1,344 new power plants expected to come on line by 2020.12 Other analysts glumly contend that the nation's coal plants, especially the older ones in the Midwest, will prove surprisingly resilient. These plants are cheap to operate, both because they were built before 1970 and are generally fully paid for and because (for political reasons) they are exempt from the most stringent provisions of the Clean Air Act. They are undeniably dirty, emitting nitrogen and sulfur particles at up to 10 times the rate permitted at new plants. Largely because of these exempt facilities, a mere 10 percent of the plants burning fossil fuels account for more than one-half of the air pollution produced by the utility sector as a whole.13 Exemption from current air pollution standards has already encouraged utilities to keep these plants in service far longer than their envisioned life span. Some analysts fear that restructuring would add to this perverse incentive by allowing the owners of these plants to market cheaper power far afield. Indeed, most of the plants in question have excess capacity: While they generally operate only 60 percent of the time now, they may be able to operate 80 percent of the time given great enough market demand.14 Is cheaper better? Competition should accelerate the decline in (inflation-adjusted) electricity prices that has been under way since the mid-1980s. According to traditional economic theory, electricity use will increase as prices fall, with a corresponding increase in the negative consequences. Indeed, the U.S. Department of Energy predicts that a rise in electricity consumption will accompany the decline in prices. In addition, changes in demand patterns may increase the use of baseload coal plants (which operate most of the time) relative to that of natural gas plants (which are generally brought on line only to meet the demand for electricity at peak times).15 Shedding programs to cut costs. To become more competitive, many utility companies have begun shedding as many "nonessential" services as they can to trim their costs. This trend has been noticeable in companies' spending on energy-efficiency programs: In 1993 and 1994, such spending amounted to about $2.7 billion; in 1997, it dropped to $1.6 billion as the companies looked ahead to increasing deregulation.16 In some cases, the political process abets this trend. For example, in March of this year, the state of Maryland adopted a restructuring law that contains little or no provision for energy efficiency. As a result of this, Maryland will become the first state with a previous commitment to energy efficiency to abandon that commitment in a competitive market. Restructuring will also affect utilities' purchases of renewable energy. In California, for instance, regulators can no longer require utilities to purchase such energy; instead, the state's restructuring law provides for a competition transition charge (CTC) to be imposed on each kilowatt-hour sold until 2002. Most of the CTC funds will be used to recompense utilities for their nuclear plants, but $540 million will support a variety of renewable energy programs. After 2002, however, these facilities may have to depend entirely on the market for support. "Manufactured" energy versus "constructed" energy. Several analysts detect a massive trend under way in the world energy system¬a trend away from the dominance of large-scale, centralized, constructed power plants that deliver power to scattered users through complex transmission and distribution networks and toward the use of small-scale, manufactured technologies that generate and store energy where consumers need it. In this vision, fuel cells, gas-fired microturbines, photovoltaic panels, passive solar architecture, reciprocating engines, double-pane windows, and the like will combine to provide "distributed energy resources" (DER). In addition, "smart" buildings will combine DER and information technology to control the production and use of energy so as to maximize energy efficiency (e.g., by eliminating losses during long-distance transmission), user comfort, and productivity all at the same time. Distributed energy resources are cleaner than their predecessors. In some cases, they allow users to exploit "waste" heat for productive purposes, thus greatly increasing overall efficiency. In others, they entail the prevention of waste in the first place. DER can also enable society to defer the upgrading of transmission and distribution lines, which have a tremendous impact on land use. Those DER technologies that burn fuel generally do so at high efficiency, thereby minimizing emissions of air pollution; the others avoid combustion and its associated impacts altogether. While environmental benefits will contribute to the success of DER, many analysts nonetheless believe that the crucial factors are their flexibility, modularity, and compatibility with complex information technology. Whither R&D? As a rule, new technologies for generating and delivering electricity take a lighter toll on the environment than old ones, if only because the former's higher efficiency reduces fuel use and emissions of waste products. New renewable and energy-efficiency technologies have some of the lightest impacts of all. These facts suggest that R&D will be crucial to safeguarding the environment in the future. Unfortunately, however, most utilities have scaled back their efforts in this area. According to the U.S. General Accounting Office, R&D spending by utilities dropped one-third between 1993 and 1996.17 This development appears to be a direct consequence of deregulation. In the past, regulatory commissions generally allowed power companies to pass on R&D costs (sometimes with a premium) directly to customers. In this era of deregulation, however, managers tend to believe that they cannot afford many R&D expenditures except those that cut costs in the short term. In addition to their own R&D programs, since 1972 many utilities have supported research through the Electric Power Research Institute (EPRI), an industry association based in Palo Alto, California. But here, too, institutional changes have had an impact on R&D spending. In years past, EPRI put its members' dues into a single pot that financed all its activities. Now, however, members may designate the specific programs they wish to support, which may exacerbate the trend toward short-term R&D. In other ways, too, EPRI's search for a viable institutional structure in a market-oriented system has contributed to the uncertainty facing R&D. For instance, the U.S. Department of Justice has received complaints that EPRI and its members are illegally delaying the deployment of DER by transferring the research licenses for these technologies to EPRIGEN, its for-profit subsidiary, which has allegedly chosen to defer their development for competitive reasons. (Because EPRI funded this research with fees collected from ratepayers, the complainants argue that it should remain in the public domain.) The validity of the charge remains unclear, but the imbroglio illustrates the uncertain future facing public-interest R&D in a restructured electricity market.18 Air pollution versus radiation. A restructured utility system presents a cruel environmental choice: Of the 103 plants in the U.S. nuclear fleet, some will certainly prove too expensive to compete in an era of restructuring. In one sense, this is an environmental benefit, removing the threat of a catastrophic accident and eliminating the intergenerational quandary of how to dispose of radioactive waste. Yet nuclear power supplied about 20 percent of the United States' electricity needs in 1997.19 Even replacing those plants with natural gas facilities would drastically increase the nation's emissions of greenhouse gases and perhaps other pollutants as well. Other nuclear plants will prove attractive investments, especially in states where consumers have to recompense utilities for at least part of their "stranded costs," i.e., the costs of nuclear facilities and other assets deemed unable to compete in a restructured market. For example, Boston Edison will sell its Pilgrim reactor (which has a book value of $700 million) to Entergy Corporation of New Orleans for $80 million plus a guaranteed $40 million in stranded cost payments. Likewise, AmerGen, a nuclear-focused joint venture between Philadelphia-based PECO Energy Company and British Energy, will purchase the still-functioning Three Mile Island Unit 1 reactor (which has a book value of $600 million) for $23 million plus another $77 million for fuel already on order.20 The purchasers of both of these plants seem to see competitive strength in becoming national nuclear power specialists, indicating that the story of nuclear power in the United States may not be entirely over. Green power. The idea of a market for green power, in which consumers would purchase electricity generated from renewable resources at premium prices, has both raised hopes and aroused opprobrium. Optimists point out that one-half of the California households that opted to switch power providers chose green power. They envision a system in which electric companies seek to differentiate their brands on the basis of environmental impact¬in other words, a system in which environmental commitment would be a competitive weapon. Noting that renewable energy now constitutes less than 2 percent of the total national power mix, they ask why environmentalists should feel an allegiance to a regulatory system that has long marginalized their concerns. Perhaps, they hope, retail competition will allow canny entrepreneurs to tap directly into the positive name recognition for renewable energy that survey after survey has uncovered.21 Pessimists sourly note that the 50,000 or so homes that buy green power in California represent a tiny fraction of the state's huge electricity market. They contend that most of the so-called green power draws on existing renewable energy facilities that were paid for by ratepayers long ago, not on new¬and presumably more expensive¬ones. And they dismiss green power as "greenwashing," a way for polluting companies to improve their image without genuinely helping the environment. While conceding that a large and genuinely green electricity market could help the environment, these skeptics put greater faith in strong government policy mechanisms such as the "renewable energy portfolio standard," which would require that a certain percentage of the electricity sold in a state be generated from qualifying renewable resources.22 |
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