Coal-fired power plants: imprudent investments?

Granger Morgan's Editorial “Don't grandfather coal plants” (17 Nov. 2006, p. [1049][1]) wisely suggests not “grandfathering” (i.e., not exempting from regulations) carbon emissions from coal-fired power plants. This is not just a matter of good policy, but it is also sensible in light of a widespread and long-standing principle of utility law. In most of the United States, state public utilities commissions decide whether costs incurred by utilities can be passed along to ratepayers or whether they will be borne by investors. For decades, commissions have based their decisions on the prudence and usefulness of decisions to build or run power plants and negotiate power contracts. A prudence review occurs after the fact, but seeks to take into account the information available at the time of the action taken. It “determines whether a utility's management decisions… were reasonable in light of all the circumstances that existed at the time the actions in question were taken” and then decides whether costs should be allowed in rates ([1][2]). In a highly relevant example, many utility commissions ordered major disallowances of nuclear-plant investments, years after allowing the initial construction, and the United States Supreme Court rejected investors' efforts to overturn those regulatory decisions ([2][3]). When utilities calculate the life-cycle risks involved in constructing a new coal-fired power plant, the likelihood of federal carbon dioxide regulation is already clearly foreseeable. Thus, as the Coalition for Environmentally Responsible Economies points out, wise investors are already demanding that corporations calculate and inform potential investors about the costs of carbon regulations ([3][4]). Morgan's Editorial is only one of many indicia that those future liabilities are currently “foreseeable.” Imagine utility investors ignoring this possibility, investing in coal technology that does not allow carbon control, and later requesting a rate increase when forced to retrofit or retire the plant. Public utility commissions could well find such decisions imprudent. That would result in the utility's investors footing the bill for expensive retrofits or even more expensive stranded costs (costs that investors cannot recover either from markets or from ratepayers). Legislators may or may not explicitly forbid grandfathering, but, regardless of that, investors should recognize that utilities that rush to add coal-fired capacity may face not only future compliance costs, but also a reality in which such imprudent costs are paid by investors, and not by ratepayers. 1. 1.[↵][5] Vermont Public Service Board, Docket No. 5983 (1998), and, more generally, “Abandoned Nuclear Plant Recovery,” 83 ALR 4th 183 (1991). 2. 2.[↵][6] (1989) See, e.g., Duquesne Light Co. v. Barasch , 488 U.S. 299. 3. 3.[↵][7] Coalition for Environmentally Responsible Economies (CERES), “Best Practices in Climate Change Risk Analysis for the Electric Power Sector” (CERES, Boston, MA, Oct. 2006), p. 22. # Response {#article-title-2} In my Editorial, I suggested that one approach to emission constraints would be to mandate controls only on plants constructed after carbon regulations go into effect “while exempting existing plants for some extended period on the grounds that firms would otherwise face large ‘stranded costs.'” I suggested that this might be a factor in the current rush to build new conventional coal plants and noted that “[s]ome investors may be counting on this or on the hope that such costs could be passed on to electricity rate payers.” In concluding, I observed that while “[a] state-by-state approach is not optimal,” it could be undertaken in such a way as to “place future liability on investors, not rate-payers, and thus send a clear message to those planning new plants…” In their Letter, Dworkin (who is the former Chairman of the Vermont Public Service Board and one of the United States' leading thinkers on utility regulation) and co-authors persuasively elaborate this argument. The message is clear. Unless investors are confident that they will face sympathetic politically appointed state regulators for decades to come, they run a considerable financial risk when they choose today to build a conventional coal plant in the face of what is now compelling evidence of the need to limit future emissions of carbon dioxide, and with technical options, now available, that could control emissions. [1]: /lookup/doi/10.1126/science.1135210 [2]: #ref-1 [3]: #ref-2 [4]: #ref-3 [5]: #xref-ref-1-1 "View reference 1. in text" [6]: #xref-ref-2-1 "View reference 2. in text" [7]: #xref-ref-3-1 "View reference 3. in text"