Perspective
Leave Green-Power Quotas to the States
Congress should not impose a federal renewable portfolio standard (RPS).
August 2004
By James W. Moeller
Since 1978, the federal government has relied on tax incentives to promote the generation of electric power from renewable resources-"green" power from hydroelectric facilities and windmills, solar panels and photovoltaic cells, facilities that burn biomass, municipal waste and landfill gas, and geothermal and ocean thermal resources.
For several years, however, the U.S. Congress has looked into promoting green power through a federal Renewable Portfolio Standard (RPS)-an alternative to tax incentives. An RPS-in effect a quota on green power-would require that a specified percentage of electric power sold by electric utilities be derived from renewable resources.
Should Congress include a green-power quota in any comprehensive energy bill?
Federal Tax Incentives
A federal RPS would supplement or perhaps even replace the use of tax incentives for green-power development. Four incentives are available under the Internal Revenue Code for investments in power generation from renewable resources.
First enacted for a four-year period in 1978, a business energy tax credit now authorizes a tax credit of 10 percent on the cost of equipment purchased and installed for power generation from solar panels or geothermal resources. The tax credit is available for equipment that complies with U.S. Department of Energy performance standards. In 1992, the tax credit became a permanent feature of the code. This incentive, however, is not available to electric utilities.
The code was revised in 1992 to authorize an electric power production credit of 1.5 cents per kilowatt-hour for power generated from windmills and in facilities that burn biomass or chicken waste. The credit is reduced, however, for green power otherwise sold for more than 8 cents/kWh. The credit expired last December.
For entities that pay no federal income tax (e.g., state and local government bodies) and non-profit electric rural cooperatives that own and operate electric power facilities, the Energy Policy Act of 1992 authorizes a production incentive, or incentive payment, of 1.5 cents/kWh for power generated:
1) from windmills and solar panels;
2) in facilities that burn biomass; and
3) from geothermal resources.
This production incentive expired in 2002.
A research tax credit adopted in 1981 not just for green power research but for basic scientific research in general has contributed to increased research on, and development of, green-power technologies. The research tax credit authorizes a credit of 20 percent of "qualified research" expenses in excess of a threshold amount, in addition to a credit of 20 percent of "basic research" payments. Both terms are defined and qualified in detail in the code. The research tax credit expires this summer.
The federal government also has promoted the development of green power through a requirement, included in the Public Utility Regulatory Policies Act of 1978 (PURPA), for electric utilities to purchase the output of small power production plants-i.e., plants that generate power from windmills, solar panels, or geothermal resources, as well as plants that generate less than 30 MW of electric power in facilities that burn biomass or municipal waste. PURPA exempts small power plants from rate regulations under the Federal Power Act but restricts plant ownership by electric utilities.
State Quotas
The states have experimented with green power quotas for years. Consistent with the observation of Justice Louis D. Brandeis that the 50 states have provided the laboratories for social and economic experiments, 14 states since 1997 have adopted an RPS in some form.1x Each RPS reflects the distinctive characteristics of the state in which it is was adopted.
In Arizona, 0.8 percent of the electric power sold in the state this year must be derived from renewable resources. In addition, 50 percent of this green power must be generated from solar panels. Next year, the overall requirement increases to 1 percent and the solar requirement increases to 60 percent.
In Nevada, 5 percent of the electric power sold in the state this year must be green power, and 5 percent of this green power must be generated from solar panels. The overall requirement increases to 7 percent next year and to 15 percent by 2013.
In New Mexico, 5 percent of the electric power sold in 2006 in the state also must be derived from renewable resources. For purposes of compliance with this quota, the generation of 1 kWh from windmills or hydroelectric facilities is worth 1 kWh of green power, the generation of 1 kWh from facilities that burn biomass or from geothermal resources is worth 2 kWh in green power, and the generation of power from solar panels is worth 3 kWh in green power.
This premium on green power from solar panels is not reflected in New England quotas, which often exclude power from hydroelectric facilities developed long ago in the Northeast.
In Connecticut, the 1 percent quota in 2004 includes green power from windmills and solar panels, but it excludes power from hydroelectric facilities.
In Massachusetts, the 1.5 percent quota in 2004 for green power from facilities constructed after 1999 includes power from windmills and solar panels and from facilities that burn biomass, but it excludes power from hydroelectric facilities.
Although the Maine RPS includes hydroelectric power, the state green-power quota is 30 percent. This figure reflects the broad development of hydroelectric resources in the state prior to the 1997 adoption of the green-power quota.
Federal RPS Proposals
The adoption of an RPS by more than a dozen states has inspired and contributed in no small measure to proposals for a federal green-power quota. Indeed, each Congress since 1997 has debated the merits of a federal RPS.
In 1997, Rep. Dan Schaefer, D-Colo., introduced a House bill (H.R. 655) to restructure electric power markets. The bill also would have established a federal RPS of 2 percent for 2004. Sen. Dale Bumpers, D-Ark., also introduced a bill (S. 237) to restructure electric markets , which would have established an RPS of 5 percent for 2004.
In 1998, the Clinton administration proposed an electric competition bill (S. 2287) that would have required 5.5 percent of the electric power sold between 2010 and 2015 to be green power. No major energy bill, however, was enacted in the 105th Congress.
The electric competition bill was resurrected in the 106th Congress (1999-2000), where it was introduced in the Republican-controlled House by Rep. Tom Bliley, R-Va., chairman
of the House Committee on Energy and Commerce (H.R. 1828), and in the Republican-controlled Senate by Sen. Frank H. Murkowski, R-Alaska, chairman of the Senate Committee on Energy and Natural Resources (S. 1047).
This time, however, some proposals would have established a green-power quota of 7.5 percent for 2010 through 2015. The U.S. Department of Energy estimated that the RPS would result in a 35 percent increase in power generation from renewable resources by 2010. Both the House bill and the Senate bill advocating this died in committee.
Contributing to the momentum for consideration of comprehensive energy legislation in the 107th Congress were the May 2001 report of the National Energy Policy Development Group, chaired by Vice President Dick Cheney; the December 2001 collapse of Enron Corp., theretofore the fair-haired child of the movement for electric competition and deregulation; and the California energy crisis, which in the summer of 2001 resulted in rolling electric blackouts.
In the House, W.J. "Billy" Tauzin, R-La., chairman of the Committee on Energy and Commerce, introduced a comprehensive bill (H.R. 4) that included no RPS. In the Senate, Jeff Bingaman, D-N.M., the senior Democrat on the Senate Committee on Energy and Natural Resources, introduced the Energy Policy Act of 2002 (S. 517). The Bingaman bill would have required 2.5 percent of the electric power sold in 2005 to be green power.
Both bills were approved, but a conference committee convened to iron out the differences between the two legislative proposals was unable to agree on, for example, oil and gas exploration on the Arctic coastal plain, and, in particular, on a green-power quota. The bills died in conference committee.
It remains to be seen if the 108th Congress can enact a comprehensive energy bill. Last year, Rep. Tauzin introduced the Energy Policy Act of 2003 (H.R. 6), which the House approved (247-175) in April 2003. The bill included no green quota. Sen. Pete V. Domenici, R-N.M., chairman of the Senate Committee on Energy and Natural Resources, also introduced a comprehensive energy bill (S. 14), but in July 2003 the Senate approved a bill identical to the Energy Policy Act of 2002 in the 107th Congress (84-14).
Just about the time a conference committee was convened to reconcile the House and Senate bills, the August 2003 electric blackout left 50 million people in New York, Connecticut, Massachusetts, Vermont, New Jersey, Pennsylvania, Ohio, and Michigan in the dark for up to 48 hours. Within nine seconds, an electric power surge caused 100 power plants and 61,800 MW of electric generation to trip offline.
The blackout accelerated the momentum for the enactment of an energy bill. Throughout the fall of 2003, however, the conference committee could not agree on, for example, a federal RPS. In September 2003, a bipartisan coalition of 53 senators urged the conference committee to include a green-power quota in a compromise bill. The request was denied.
In November 2003, the conference committee proposed a compromise Energy Policy Act of 2003. The House approved the bill (246-180), but it was filibustered in the Senate. A subsequent motion for cloture was rejected (57-43), and the legislation was dead for 2003.
In response to objections to the $31 billion cost of the compromise bill, Sen. Domenici recently introduced the Energy Policy Act of 2004 (S. 2095), which pares $17 billion from the conference committee proposal. The Domenici bill at press time was on the Senate floor, and an amendment to include a federal green-power quota in the Energy Policy Act of 2004 is anticipated.
Federalism and Electric Power
A federal RPS would require that a specified percentage of electric power sold by electric utilities into retail markets be derived from renewable resources. A federal RPS is predicated, therefore, on the assumption that the federal government regulates retail markets for electric power.
Congress could, of course, authorize the Federal Energy Regulatory Commission (FERC) to regulate wholesale as well as retail electric power sales and services. However, in the Federal Power Act of 1935, the organic statute for federal regulation of electric utilities, Congress authorized FERC to regulate just wholesale electric power. The regulation of retail electric power was left to the states and to the state public service commissions.
The regulation of retail sales and services also was left to the states under PURPA, Title I, which established numerous retail policies for electric utilities. The policies were intended to promote the conservation of electric power and the efficient use of generation facilities and fuels.
The retail policies were not imposed on electric utilities. Indeed, PURPA left the adoption and implementation of the retail policies to state public service commissions, which could choose to adopt or reject each standard. The statute guaranteed that nothing therein precluded the adoption of state policies different from the retail policies of PURPA.
In this regard, PURPA reinforces the traditional jurisdictional divide between federal regulation of wholesale sales and services and state regulation of retail sales and services. This jurisdictional formula has worked well for almost 70 years. There is no compelling need now for Congress to interfere with the traditional state prerogative to regulate the retail rates and services of public utilities.
The experiment with green-power quotas began with state legislatures and state public service commissions. The experiment should continue not on the federal level but on the state level. Congress should not impose a federal RPS. Instead, PURPA should be amended to include an RPS among the retail policies that can be adopted or rejected by state public service commission.
Leave the green-power quotas to the states.
Endnotes
- To date, Arizona, California, Connecticut, Hawaii, Illinois, Iowa, Maine, Massachusetts, Minnesota, Nevada, New Jersey, New Mexico, Texas, and Wisconsin all have an RPS.
James Moeller is a partner is the Washington, D.C., law firm of Brunenkant & Haskell. This piece is based on an article to appear in the next issue of the Fordham Environmental Law Journal. Moeller can be reached at moeller@bh-law.com.
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