Minnesota commission to look at arguments over CO2 penalties

The Minnesota Public Utilities Commission at its Oct. 18 meeting will be looking at a range of arguments over whether and by how much it should raise a CO2 emissions penalty that restricts coal-fired power generated in the state, and coal power wheeled in from out of state.

Under the 2007 Next Generation Energy Act passed by state legislators, by January 2008 the commission needed to establish an estimate of the likely range of costs of future CO2 regulation on electricity generation. The estimate, which may be made in a commission order, must be used in all electricity generation resource acquisition proceedings. The estimates, and annual updates, need to be made following informal proceedings conducted by the commissioners of commerce and pollution control that allow interested parties to submit comments.

  • In December 2007, the commission issued an order estimating that CO2 regulation of electricity generation will cost between $4/ton and $30/ton for CO2 emitted in 2012 and thereafter.
  • In October 2009, the commission established a range of $9 to $34/ton for CO2 emitted in 2012 and thereafter.
  • In June 2011, the commission issued an order maintaining the estimate of the range of likely costs of CO2 regulation at between $9 and $34 per ton of CO2 emitted in 2012 and thereafter.

In an Oct. 8 briefing paper that outlines the arguments leading up to the latest commission decision in this matter, commission staff laid out the arguments of various parties to this case. As part of a process of developing a recommendation for the range of cost estimates for future cost of CO2 regulation on electricity generation, the Minnesota Pollution Control Agency and the Minnesota Department of Commerce, Division of Energy Resources published preliminary recommendations and requested comments from interested parties.

In March, Xcel Energy (NYSE: XEL), the Interstate Power and Light unit of Alliant Energy (NYSE: LNT) and Otter Tail Power each filed comments with the commission and the state agencies. The state agencies also received comments from the Industrial Commission of North Dakota (ICND) and the Lignite Energy Council (LEC) in North Dakota, who both said this law imposes unfair constraints on lignite-fired power wheeled in from power plants in neighboring North Dakota. March comments also came from the Izaak Walton League of America, Fresh Energy and Minnesota Center for Environmental Advocacy.

On July 19, the state agencies filed a report with the commission recommending that it maintain the current estimate of the range of likely costs of CO2 regulation at $9 to $34 per ton. They didn’t include a recommendation regarding the year the cost range should begin to be applied.

The Industrial Commission of North Dakota argued that the cost estimate range should not be applied to out-of-state facilities. The Lignite Energy Council argued that the application of a resource selection penalty will have an adverse impact on lignite-fired generation. It said the existence of the resource selection penalty, if applied to remote lignite-fired generation, will have a “chilling and negative impact” on the consideration of lignite-fired generation as a resource of choice among utility planners in advance of formal consideration by the commission of competing resource choices.

The LEC also said the assignment of a cost for CO2 regulation on facilities located outside Minnesota’s borders is beyond the police power of the state of Minnesota and in violation of the Commerce Clause of the U.S. Constitution. The LEC requested that the commission either reaffirm its 1997 decision and not apply a value to the cost of CO2 regulation on out-of-state electric generating resources, or determine that the appropriate value for out-of-state electric generation is $0.

Utilities mostly argue for a status quo approach

IPL said it can generally support the $9 to $34 per ton range recommended by the state agencies. However, IPL does not support applying the values in 2013. IPL stated that, based upon past implementation history of major environmental legislation, rules, and regulations, it is reasonable to believe that even if legislation were adopted by Congress in 2013, it is unlikely that any CO2 emission reduction programs would begin any earlier than 2016 and potentially as late as 2018.

Notable is that when Republicans took control of the House in the 2010 mid-term elections, all serious consideration of cap-and-trade CO2 legislation in Congress effectively died. Observers think it would only be revived if Democrats take back control of the House, and retain the White House and Senate, in the November elections.

In April 2012, EPA proposed CO2 emission generation performance standards for new electric generating units. This standard is expected to be effective in 2013. However, complying with this standard will require incremental costs, to the extent that any exist, to be fully internalized in any new generating resources considered in resource planning, IPL argued. It stated that under EPA regulation to reduce power plant CO2 emissions, compliance costs would be internalized as part of the resource planning process, meaning that the cost of compliance would be included as part of the cost of the resource selected, whether as a capital expenditure or as an on-going O&M expense. Including a CO2 price when these EPA regulations are in place would result in a duplicative cost, IPL said.

Minnesota Power stated that it believes that the most accurate approach the commission can take is to update the previously approved ranges, adjusted for inflation. Until federal legislation is enacted and more specific regulatory costs are known, the commission should update the start date for applying these ranges to no earlier than 2021, the utility added. Minnesota Power argued that this date reflects the continued regulatory uncertainty around carbon policy. Minnesota Power is part of Allete (NYSE: ALE).

In Aug. 17 comments, Otter Tail Power, a subsidiary of Otter Tail Corp. (NASDAQ Global Select Market: OTTR), stated that it continues to support the range of $9 to $34 a ton as an estimate of the costs of CO2 regulation. Otter Tail recommended that the estimated effective date for the regulatory costs should be 2020 or later.

In its Aug. 20 comments, Xcel Energy stated that it supports the cost range of $9 to $34 per ton of CO2 emitted. It said that based on its review of forecasts of the potential for federal policy action, 2020 should be established as the year in which utilities should start including these cost for planning purposes.

Dairyland Power’s filing argued that the externality costs have become obsolete as a regulatory matter, and requested clarification as to what role, if any, the cost estimate should play in utilities’ integrated resource plans. Dairyland argued that regulatory developments following the commission’s establishment of an initial interim estimate and subsequent revisions to the range of cost estimates have greatly diminished the value of the estimate in resource acquisition proceedings.

Dairyland also questioned the ongoing usefulness of the CO2 cost estimate due to the practical impossibility of siting new coal plants within the state of Minnesota or importing electricity generated from new coal plants sited outside the state. It noted that as of 2009, Minnesota effectively imposed a moratorium on both new coal construction and imports of electricity from new coal plants. Dairyland argued that Minnesota’s moratorium on new coal plants, as well as EPA’s proposed New Source Performance Standards for CO2 emissions from new coal plants, are enough to prompt utilities to modify their resource plans regardless of the upper limit of the estimated range of likely CO2 costs arrived at by the commission.

Commission staff, at the end the Oct. 8 position paper, outlined these possible alternatives for a commission decision:

  • Decide to continue using current range of $9 to $34 per ton of CO2 as recommended by the state agencies.
  • Establish $0 as the bottom of the range to reflect current regulatory uncertainty for a range of $0 to $34 per ton of CO2; and
  • Update the range to use other values the commission considers appropriate.

As for the options on the year to begin applying the values, staff said they include:

  • Keep 2012 as the year in which utilities begin applying these costs in their planning.
  • Determine that utilities should begin applying values as of 2013.
  • Adopt the start date for applying these ranges as of 2020.
  • Determine that some other effective date is appropriate.
About Barry Cassell 20414 Articles
Barry Cassell is Chief Analyst for GenerationHub covering coal and emission controls issues, projects and policy. He has covered the coal and power generation industry for more than 24 years, beginning in November 2011 at GenerationHub and prior to that as editor of SNL Energy’s Coal Report. He was formerly with Coal Outlook for 15 years as the publication’s editor and contributing writer, and prior to that he was editor of Coal & Synfuels Technology and associate editor of The Energy Report. He has a bachelor’s degree from Central Michigan University.