Proposed EPA guidelines may tip the ‘balance of power’

As Arkansas regulators contemplate how to cut carbon emissions from the state’s fleet of coal-fired power plants, reducing the state’s dependence on its cheapest and most plentiful source of power could turn out to be a monumental and very expensive task.

In the days following President Barack Obama’s executive order mandating a 30 percent reduction in carbon dioxide emissions from electric generating plants by 2030, many supporters and critics have weighed in on the task ahead and, of course, the costs.

Arkansas Electric Cooperative Corp. (AECC), which oversees Arkansas’ 17 electric distribution cooperatives, said it was concerned how the Environmental Protection Agency’s proposal will impact future rates and the reliability of Arkansas’ electric generating capacity.

“We are disappointed that this EPA rule will reduce our use of coal, which is our most economical and reliable fuel to generate electricity,” AECC President & CEO Duane Highley said. “Although the proposed rule leaves the precise implementation details to the states to develop, the inevitable result will be the use of more expensive fuels, such as natural gas.”

Others critics from the business community and the state’s congressional delegation also echoed Highley’s concerns. Many have cited a study by the U.S. Chamber of Commerce’s Institute for 21st Century Energy, which issued a 71-page report saying the EPA’s plans to regulate carbon dioxide emissions from power plants will cost America’s economy more than $50 billion a year between now and 2030.

“Americans deserve to have an accurate picture of the costs and benefits associated with the administration’s plans to reduce carbon dioxide emissions through unprecedented and aggressive EPA regulations,” Energy Institute President & CEO Karen Harbert said. “Our analysis shows that Americans will pay significantly more for electricity, see slower economic growth and fewer jobs, and have less disposable income, while a slight reduction in carbon emissions will be overwhelmed by global increases.”

EPA SUPPORTERS
On the opposite end of the spectrum, dollars signs were also on the mind of the Sierra Club of Arkansas. But instead of additional costs to Arkansas consumers, Glen Hooks, director of the Arkansas chapter of the environmental group, said carbon pollution causes climate disruption and is already costing American communities billions of dollars from flooding, wildfires and extreme heat.

“By cleaning up and modernizing our aging, dirty power plants, we will begin to clean up our air, cut pollution-related illness and curb the worst effects of climate disruption,” Hooks said of Arkansas’ coal-fired power generation. “Curbing dangerous carbon pollution from power plants will not only save billions of dollars, it will also save lives.”

Notwithstanding the difference in opinions about the costs associated with the EPA’s proposal, all of the stakeholders say the process of developing a new power generation plan for Arkansas will be difficult and complex. Like the federal Affordable Care Act, known widely as Obamacare, President Obama’s new EPA standard allows regulators and stakeholders to design and implement a plan for its retail power marketplace that fits the need of Arkansas’ residential, commercial and industrial electric consumers.

According to the latest EIA statistics, as of Feb. 14, Arkansas ranked 29th among the 50 states in the amount of total carbon dioxide or “dirty air” emissions with 67 million metric tons. By comparison, Texas is ranked first with 656 metric tons of carbon emissions, while Vermont and the District of Columbia have the lowest emissions at 3 and 6 million metric tons.

The Arkansas Department of Environmental Quality (ADEQ) and the state Public Service Commission (PSC) have already begun stakeholder discussions intended to create an Arkansas plan pursuant to the new standard.

In an interview with Talk Business & Politics, ADEQ Director Teresa Marks said her department and the PSC have their work cut out for them. Although she was pleased that state regulators will have the flexibility to adapt a plan that is going to fit the needs of Arkansans, the state environmental chief said her department has the unenviable task of briefing stakeholders about the controversial guidelines.

“I think we have a lot of work ahead of us to determine what options or combinations of options will work best here in Arkansas,” Marks said of the 645-page proposal. “We will be pouring through it over the next several weeks.”

STATE’S LAST EFFORTS POWERED OUT
The state’s last attempt to restructure Arkansas’ electric power marketplace ended spectacularly in February 2003, when House Bill 1413 was signed by then-Gov. Mike Huckabee in order to repeal earlier enacted deregulation legislation. The Arkansas General Assembly passed Act 204 and determined that it was in the public’s best interest to continue regulating electric utility rates for the foreseeable future.

Those actions by Huckabee and state lawmakers in the winter of 2003 essentially killed the much-lauded Electric Consumers Act of 1999, which mandated in the retail sale of electricity beginning as early as Jan. 1, 2002.

The original act was intended to restructure the electric power industry and allow retail access by January 2002. Stranded costs were to be recovered via a competitive transition charge and the sale of bonds. Rates were to be frozen for three years for utilities seeking stranded cost recovery and one year for those that did not.

In addition, the PSC was empowered to force divestiture of generation assets to alleviate market power, and it was allowed to decide if stockholders should share stranded cost recovery with ratepayers. Utilities were required to functionally unbundle generation, transmission, distribution and customer service and file unbundled rates with the PSC by Jan. 1, 2000.

But most of those initiatives never got off the ground. In October 2000, the PSC opened a docket to study the electric power market. It wanted to ensure that the power supply problems and price spikes that occurred in California in the summer of 2000 did not occur in Arkansas when restructuring was scheduled to begin in 2002.

But Entergy and other state utilities suggested delaying the start for competition until Oct. 1, 2003, or Oct. 1, 2005, at the latest. Prevailing legislation required the retail market to open by June 30, 2003, at the latest. The PSC, utilities and the state attorney general’s office all agreed that the original timetable was unlikely to be carried out, but disagreed on when competition would begin. The PSC was directed to present its recommendation to the legislature in mid-November 2000.

On Nov. 29, 2000, the PSC issued the much-awaited “Report on Electric Restructuring” to the Arkansas General Assembly. State regulators recommended the date for deregulation be extended from the original timeframe in the restructuring legislation of Jan. 1, 2002, through June 30, 2003, to Oct. 1, 2003, through Oct. 1, 2005.

In the next legislative session in 2001, the Arkansas General Assembly approved Senate Bill 236, which was signed into law as Act 324. The new act delayed the start of deregulation from January 2002 to October 2003. The PSC was also authorized to initiate further delays based on the adequacy of the state’s transmission system and generating capacity to support a competitive market.

In December 2001, the PSC submitted another report to the General Assembly pursuant to Act 324, assessing the progress of restructuring in the Arkansas electric industry. The PSC recommended that the General Assembly either completely suspend the current statute to some future date or repeal the laws related to retail open access.

The recommendations were based on the prevailing absence of an operating regional transmission organization and the lack of evidence that customers, especially residential and small commercial customers, would realize a net price benefit from retail open access.

In comments from the PSC staff, it was also stated that in order for competition to exist, improvements to the transmission system were needed to assure that the major load centers in Arkansas have equal and reasonably unconstrained access to generation supplies.

By the time the 2003 General Assembly rolled around, Arkansas lawmakers had spent nearly two years reading headlines about the California energy crisis and how Enron Corp. had gamed consumers for billions of dollars in that state’s deregulated marketplace. Once the session began, the death of deregulation was inevitable.

One of the interesting bullet points that came out of the PSC’s staff recommendations to postpone the state restructuring efforts was that there was no “federal push” for competition in the nation’s electric retail market, especially after the California energy crisis caused massive blackouts, electric supply shortages and historic spikes in wholesale power prices.

At the time, the Federal Energy Regulatory Commission was charged with overseeing the final rules regarding the restructuring of the nation’s electric industry. Now, more than 11 years later, the Obama administration has essentially picked up the ball and restarted those efforts at the statewide level through the president’s favorite and most active government agency – the EPA.

But not much has changed over the last decade since the state’s deregulation efforts were stalled. Arkansas’ electricity profile is essentially the same.

For instance, four of the five largest power plants in Arkansas are still operated by Entergy Arkansas. The natural gas-powered Union Power Station in El Dorado, owned by the Tampa, Fla.-based Entegra Power Group, is the state’s largest power plant with a net generating capacity of 2,200 megawatts, according to the U.S. Energy Information Administration (EIA).

But next on the list is Entergy’s Arkansas Nuclear One plant in Russellville, the coal-fired White Bluff and Independence facilities in Redfield and Newark, respectively, and the recently retired Robert E. Ritchie gas-powered plant in Helena.

In addition, the top providers of electricity in Arkansas are still the same as a decade ago. Entergy Arkansas is by far the largest electric retailer in the state with more than 700,000 customers in 63 counties across the state. Southwestern Electric Power Co. is second with just over 114,000 electricity users in Arkansas, with Mississippi County Electric Cooperative, Oklahoma Gas and Electric and First Electric Coop Corp. rounding out the top five.

CHEAP, PLENTIFUL COAL STILL KING
Once regulators and stakeholders come to the table to implement Arkansas’ new EPA-mandated electricity standards, the obvious “elephant in the room” will be any discussion on the topic of coal. If the EPA regulations drastically reduce the usage of coal, the reliability of Arkansas’ energy grid system will be at risk, said Sandy Hochstetter Byrd, vice president of member and public relations for the AECC.

Byrd should know. She is the former chairman of the PSC who played a central role in recommending that the state delay deregulation of the electric industry more than a decade ago.

“Coal is the lowest cost source for energy for our members and that is obviously a concern to us,” Byrd said. “For many years, coal has been our workhorse.”
In fact, Arkansas’ history with coal goes back more than a century. Coal was Arkansas’ first mineral used for fuel output, primarily for powering steam engines and heating homes and businesses between 1880 and 1920. Over the last century, however, oil and oil byproducts have pushed aside the popularity of coal as a fuel, and the mining of coal is minimal in Arkansas.”

However, coal is still king when it comes to generating electric power in Arkansas. And it is cheap. Between 1990 and 2012, the price of coal has ranged between $1.42 and $2.22 per million BTU (British Thermal Units), according to the EIA. By comparison, natural gas peaked in 2008 at $8.90 per million BTU. However, prices in 2012 fell to their lowest at $3.12 per million BTU, and closed on June 6 at $4.54 per million BTU on the New York Mercantile Exchange.

But even with the EPA’s pressure on coal-fired generation and cheaply produced natural gas from the nation’s numerous shale plays, coal is still the largest single fuel for electricity generation in Arkansas.

In fact, coal’s monthly share of total generation in Arkansas has fallen below 40% only three times over the past 35 years, EIA statistics show. In November and December of 2012, coal’s percentage of monthly electricity dropped below 40% for the first time in 35 years. Before that, the last time coal’s share of total generation fell below 40% for a monthly total was March 1978, the EIA’s Electric Power Monthly report shows.

Today, coal-fired power represents 44.5% of Arkansas’ annual net electric generation. Natural gas-fired generation is second at 23.2% and nuclear energy is next at 19.4%. Renewable energy generates about 6.4% of the state’s power needs and hydroelectric fills 5.4% of the state’s electric capacity. Petroleum-fired fuel, once a staple for heating oil, now generates less than 1% of the state’s power (0.6%).

Nationwide, coal has been the largest source of electricity generation in the United States for more than 60 years. However, its annual share of total net generation declined from nearly 50% in 2007 to 39% in 2013 as some power producers switched to more competitively priced natural gas.

GUIDELINES OPEN OTHER DOORS
Once Arkansas begins developing a new strategy to meet the EPA’s four-pronged guidelines, Entergy officials hope that the state’s largest utility will get credit for its nuclear plant operation in Russellville. Nationwide, New Orleans-based Entergy Corp. has voluntarily cut its carbon emissions across the utility giant’s system by shifting from older coal-fired plants to newer natural gas plants, and by expanding its national fleet of nuclear reactors to 12 power plants in eight states that produce nearly 90 million megawatt hours of generation.

If Entergy gets recognition for its nuclear powered generation, the utility giant will be well ahead of the EPA’s carbon cutting goals in Arkansas and across its operating footprint, said Chuck Barlow, vice president of environmental policy and strategy for Entergy.

“(The EPA) has got to give us credit for our nuclear megawatts,” Barlow said of the Nuclear I and II power plants in Russellville. “We use coal, but we also [produce] a lot of nuclear and it has zero carbon emissions.”

Meanwhile, environmental advocates and energy efficiency supporters also say the new EPA standards also should open the door for ramping up the use of renewable energy in Arkansas, including wind, solar, biomass and other low-carbon sources of power.

The Sierra Club’s Hooks said Arkansas power plants released nearly 41 million metric tons of carbon pollution in 2013 – with nearly 85% of that coming from just five coal-fired power plants. Three of these older plants (Entergy’s White Bluff and Independence plants, and SWEPCO’s Flint Creek plant) were constructed in the late 1970s and early 1980s, he said.

“Reducing carbon pollution is good for both our environmental and public health, plus it will create thousands of clean energy and energy efficiency-related jobs right here in Arkansas,” the Sierra Club spokesman said. “We look forward to working closely with utilities and regulators to help clean up Arkansas’ carbon emissions.”

Arkansas has adopted several policies to encourage energy efficiency and renewable energy. For example, the Sustainable Energy-Efficient Buildings Program was enacted in 2009, directing the Arkansas Energy Office to develop a plan for reducing energy use in all existing state-owned major facilities by 20 percent from 2008 levels by 2014 and 30 percent by 2017.

Also in 2009, the Arkansas Alternative Energy Commission was created to study the needs and impacts of various forms of alternative energy on the economic future of Arkansas. More recently, the PSC announced a Sustainable Energy Resource Action Plan requiring implementation of energy-efficiency measures by the state’s investor-owned utilities.