And your text:
Here’s where W-M got it right. It forbids distributors from giving customers the value of the free allowances as a “per unit price rebate.” So retail customers will still have to pay a price for power and natural gas that includes a carbon price signal. The free allowance value must be given to them as a lump sum rebate.

First, how will this apply to industrial and commercial customers? For example, the North Carolina legislature applied a per account cost cap when it implemented a state RES. This has never really been satisfactorily resolved due to questions about facilities with multiple accounts, etc. In practice, this kind of a lump sum rebate becomes problematic precisely for the utility customers who are most likely to be sensitive to these sorts of price signals.

Second, how will this be interpreted in light of very specific state laws that require NET environmental costs to be passed along as part of the metered fuel-related (energy) charge to customers? Sales of acid rain permits are, I believe, netted out of these accounts.

I am not aware of any precedent for the treatment you describe in W-M and I expect that proceedings to establish these lump sum rebates would be quite confusing and contentious. Consumers will have to hope that their interests are protected by commissions and the state’s consumer representatives (if any, see South Carolina for an example of a state without a dedicated consumer representative). Certainly no clean energy/environmental group can afford the lawyers and experts needed to effectively engage in the many proceedings that will result.

Ultimately, there are two ways that utility commissions can affect the global warming pollution from power plants. First is to drive dispatch decisions by ensuring that the utility is held accountable for minimizing the fuel-related charges passed through to the customer. Seems like this essay is saying that W-M has that covered.

Second, is to drive utility investment in clean energy choices rather than continuing to build and operate coal plants. This will take a while – utilities have already locked in their power plant approvals through 2015 or even 2020. A utility commission will not hold a utility accountable for continuing to develop and build an already-approved power plant, even if that power plant results in higher costs for customers as soon as it is brought on line.

This is the fundamental reason that Duke Energy is fighting hard for this treatment. They made a business decision to move forward with the Cliffside power plant, and now they are very carefully maneuvering to ensure that higher than “anticipated” cost to operate the power plant is not something that a utility commission asks them to absorb. It is these plants “in the pipeline” that fundamental questions about regulation, fairness, etc. are played out, and there is no easy answer. Even the answers that look “right” will be complicated and subject to manipulation.

[JR: The same thing that stops them now from overcharging you for electricity -- the PUCs.]

You stated:

“This will ensure that the 25 states that depend on coal for more than 50% of their electricity are not punished with immediate rate shock by climate change legislation. These states will have to shut down and replace the majority of their fossil fuel power plants as a result of the climate change legislation. Having to pay for emission allowances up front to keep power flowing is an unfair “double hit.”"

I’m sorry, but your last sentence confuses me. Are you really saying that in 2012 when the cap starts, they will have to shut down all the coal plants to avoid buying allowances to avoid passing on this double hit to consumers? This is exactly the point my electric company is arguing right now but they don’t seem to read it the way you do–they say that the coal plants will keep running and consumers will just pay more. They say free allowances will only cover 50% of their emissions, so we will have to pay for the other 50% plus the cost of the new infrastructure which won’t be ready very soon. While they generate slightly over 50% from coal, they do get 20% from wind and are a big wind leader. To me it looks like they either have to replace 50% of their generation nearly overnight, which seems impossible, or pass on the double hit to the consumers which you say is to be avoided. Please explain how the double hit is avoidable in this situation.

Also, since this post started as avoiding windfalls, can you explain how a generator who has say a 10:90, coal:hydro mix who directly supplies their electricity to a massive urban population does not end up with a windfall? They surely will be given more allowances than they have emissions based on the 50:50 allocation formula.

“With these provisions, it will be awfully hard for any utility to harvest a windfall from the free allocations — especially a shareholder-owned utility. Yes, the free allowances given to the distribution utility will be worth a lot. But the law is pretty clear that the benefits of receiving the free allowance go to the utility’s customers, not their shareholders”

The law is “pretty clear”? It will be “awfully hard”?

This is not the definitive language of your headline Joe…

I have a crazy idea-if we want to protect consumers why not return the auction revenue to them directly?

[JR: I disagree. But if you are right, then nothing will help us and you should move on to a different website.]

We have crossed at least 3 tipping points already and we are about to cross a fourth. There is enormous hysteresis, which means that a tipping point, once crossed, cannot be uncrossed for thousands of years. Tipping points mean death and extinction.
Tipping Point 1. Reference: “With Speed And Violence” by Fred Pearce, 2007. Mr. Pearce has seen formerly frozen peat bogs in the tundra in Siberia that are now lakes outgassing so much methane that they don’t freeze over in Siberian winter. There is enough methane in tundra peat bogs to raise the global temperature by 18 to 21 degrees Fahrenheit. Reference: “Six Degrees” by Mark Lynas. Another 10 degrees Fahrenheit will surely cause our extinction.
Tipping Point 2. Methane is bubbling out of the Arctic Ocean. This methane is coming from the methane clathrates that are frozen at the bottom of the ocean. [A CLATHRATE is an ice thing that traps methane.]
Tipping Point 3. Loss of ice on the Arctic Ocean. The dark ocean water absorbs sunlight. Ice on the ocean reflects sunlight. A change in the amount of ice tends to run away.
We are about to cross Tipping Point 4. 450 parts per million [ppm] CO2 equivalent. We are at 387 ppm CO2 but when you add in the CH4 [methane] and the other greenhouse gasses, we Are at 430 ppm equivalent and rising fast. “The vanishing Face of Gaia” by James Lovelock, 2009, page 153 says that paleohistory shows a sudden 9 degree rise at 450 ppm equivalent. The physics is not stated. We are almost there. Note that climate does not change in a continuous, linear fashion. The climate lurches. The climate has in the past made many sudden and unexpected changes. There seem to be stable states. In between stable states, the climate jumps back and forth between the stable states.
Arctic ocean ice makes as much difference as 70% of the 386 ppm of CO2. Source: “The vanishing Face of Gaia” by James Lovelock, 2009. With Zero CO2, the earth average temperature would be at, if memory serves, [don't depend on my memory] 18 degrees below zero Centigrade. Actual earth average temperature is 15 degrees centigrade above zero. That is a 33 degree centigrade difference. Melting all of the Arctic ocean ice adds 70% of 33C which is 23 degrees centigrade or 41.4 degrees Fahrenheit. Add 20 degrees for the methane coming out of the tundra peat bogs and 20 degrees for the methane coming out of the Arctic Ocean clathrates. That makes 81 degrees of temperature rise. If the land temperature is above 75 degrees F, it turns into a desert because of fast evaporation. Source: “The vanishing Face of Gaia” by James Lovelock, 2009. The sum of the 3 tipping points that we have already tipped is 8 TIMES what is required to make Homo Sapiens extinct.

“they will offer their power in the wholesale market at a price that will cover all of their costs, which include the market price of allowances consumed in generating the power. It’s economically correct (an opportunity cost is just as valid as an out-of-pocket cost),”

Does an opportunity cost have the same price signal as an out-of-pocket cost? In the short term, I don’t think so, though over time, the two will merge. In a pure market environment, the two would be closer, but given inertia in a large company with an expensive infrastructure, the free permits will make it easier for some utilities so inclined to sit on the status quo since the regulations protect their profit margins. The lack of out-of-pocket costs will let them take their time in making changes compared to having to actually pay.

So I think that the main impact of this is to slow down the process. When dealing with partial solutions, the question is whether the partial solution blunts pressure for a full solution, or opens the door to it. I don’t think there really is any way for us to know which path W-M leads in that sense. A lot will be determined by whether the US is hit by a string of extreme weather events in the next year or two.

I also read that the committee that passed W-M is the friendliest part of the legislative process. Ag Committee wants a shot at it, only to water it down – is it Pelosi’s decision whether they get a shot? Then it has the full House, and the Senate sees it as close to DOA as is. So this is only the first step in the sausage-making process. A snapshot of W-M now probably looks great compared to whatever might make it to Obama’s desk, if anything.

The ELDCs are NOT covered entities. “We” are NOT choosing between giving them permits for free and having them purchase them at an auction. They do not have to hold any permits whatsoever. Right?

Distributing a certain amount of allowances to ELDCs in the specific manner specified in W-M is simply one use of allowance value, not really “free allocation.”

That said, I would be interested in understanding the pros and cons of distributing this value to ELDCs as allowances rather than as auction proceeds.

If new renewable generation is 10% of fossil-fuel generation, then a $20/MWh charge on the latter could support a $180/MWh subsidy for the former. If it is not politically feasible to impose a $20/MWh charge on ratepayers, then just decide how much is feasible, and use the revenue exclusively to support new renewables that serve the same ratepayers.

Re “These states will have to shut down and replace the majority of their fossil fuel power plants as a result of the climate change legislation.”: Yes, that is the point of climate change legislation. If the carbon fees on fossil-fuel plants are used exclusively to expand renewable generation serving the same customer base, then ratepayers would not necessarily be disadvantaged. The subsidies for new renewables can be provided in exchange for equity shares, which will give ratepayers dividends that increase — not decrease — as carbon is phased out.