Climate Change Insurance

A Public Service Commission hearing in Missoula a week or so ago produced an odd and somewhat heated exchange between John Hines, the vice-president for supply at Northwestern Energy, and Monica Tranel, an attorney representing the Montana Consumer Counsel. Hines was trying to convince the PSC (and the public in attendance) that Northwestern should be allowed to purchase a bunch of power dams to the tune of some $900 million, and Tranel was having none of it. Too much money, she said, and ultimately it would be the consumers who would have to foot the bill. 

Now I don’t know much about putting a price tag on a power dam, let alone a whole slew of them, so I don’t know whether $900 million is too much, too little, or just about right, but I do appreciate the fact that some part of that money is intended to buy a kind of insurance that will protect Northwestern’s ratepayers from the adverse impacts of future climate change policies.  Here’s the way it works.

The EPA, operating under its Clean Air Act authority, will soon be coming out with regulations to limit carbon emissions from both new and existing power plants (the standards for new plants have been in the works for some time now). Although the details remain to be seen, these regulations will almost certainly raise the cost of generating electricity at coal fired power plants (and possibly at natural gas fired plants as well). The corollary is that power dams, which have no emissions, will have a distinct competitive advantage over coal and natural gas and as a result their value will rise.  That means that anyone (like Northwestern) wanting to buy a power dam will have to pay something extra for the privilege of avoiding the cost of complying with carbon regulations. Of course Northwestern is not going to pay that extra dough out of the goodness of its corporate heart. No, it is going to ask the Public Service Commission to pass on to its rate payers the cost of owning the dams, including the premium attached to the fact they don’t emit carbon.

That’s the downside. The upside is that if it owns the dams, Northwestern is not going to have to go out on the market, buy electricity from those costly coal fired plants, and pass the cost of that pricey electricity on to ratepayers.

But one way or another, the result of carbon regulations is that rate payers are going to pay more. The question is: how much more? And what’s the best way to deal with this situation? Is it cheaper for consumers to incur the extra cost of buying the dams in order to avoid buying the pricier electricity resulting from carbon regulations? Or would it be cheaper not to buy the dams and instead pay for more expensive electricity at some point in the future? Northwestern obviously likes option one. No one knows with certainty how much the regulations will raise the price of electricity, but Northwestern appears to believe that the price increases are likely to be large enough to justify paying extra for the dams. Whether they are right about that or not is a legitimate question, and it’s the question the Public Service Commission should be asking.*

And here’s where the Consumer Counsel comes in. Because if I heard Tranel correctly, she was saying that in buying the dams, Northwestern shouldn’t pay any premium at all to avoid the cost of controlling carbon emissions.  And she implied that if that means that Northwestern can’t complete the purchase, it will be no skin off the company’s nose: After all, she said, if the company has to pay more for electricity after the carbon regulations take effect, it can always go to the Public Service Commission and arrange to pass the extra cost on to rate payers.

Well yeah, but doesn’t that beg the question? Doesn’t it assume that consumers will be better off if, after the regulations take effect, Northwestern buys electricity on the market rather than generating it in its own dams, regardless of what it pays for the dams? That’s a little like assuming that no insurance policy is ever worth what you pay for it. And if the Counsel makes that assumption does it really have the interests of consumers at heart? Apparently not: When it says that Northwestern can always be held harmless in the face of rising electricity costs by passing on those rising costs to consumers, the Counsel seems to be more concerned about insuring Northwestern than the ratepayers.

* There are a lot of other aspects of the proposed dam purchase and the proposed price that the PSC needs to look at of course.