On RGGI, Democrats resist cost carveouts for some power producers while greenlighting others

By: - February 27, 2020 12:01 am

A natural gas -fired power plant. (Stock photo via Getty Images)

As Democrats bring home one of their top-line energy goals of the session, joining Virginia with the cap-and-trade Regional Greenhouse Gas Initiative, the caucus is holding firm against one company’s efforts to bring down its compliance costs even as it’s quietly cleared the way for two power producers to pay less.

In committee and on chamber floors, Democrats have repeatedly voted down bill amendments that would allow LS Power, the company that owns the Doswell Energy Center in Hanover County, to pay less for the carbon allowances it will have to purchase at auction from the state under RGGI during a five-year transition period.

At the same time, however, Democratic senators have largely turned a blind eye toward exceptions that would be carved out for two as yet unbuilt natural gas plants in Charles City County. Those carveouts, which are outlined in a bill sponsored by Sen. Lionell Spruill, D-Chesapeake, passed the Senate and will be taken up by the House Labor and Commerce Committee Thursday afternoon.

But while Democrats in the General Assembly have shown mixed concern for the impacts RGGI compliance will have on business, Gov. Ralph Northam’s administration has vigorously opposed any dilution of the revenues the state is set to receive under RGGI.

“Giving one company a bailout to the tune of tens of millions of dollars just isn’t something that we think is appropriate,” Secretary of Natural Resources Matt Strickler told the House Labor and Commerce Committee Feb. 20. 

Transitioning business or ‘blowing a hole’ in state revenues?

LS Power, a major electric generation, transmission and distribution company with tens of billions in financing, has proved a thorn in the administration’s side this session.

The company has sought to insert a provision into the RGGI legislation Democrats are pushing to cap the costs they would have to pay as the state enters the carbon market. 

Under RGGI, Virginia will be subject to a carbon emissions cap that declines each year. Carbon emitters will be required to purchase annual carbon allowances at a state-run auction, with 97 percent of revenues — estimated by the state to be between $104 and $109 million annually but by some industry analysts using SCC estimates to be as high as $163 million — going to flood preparedness and energy efficiency programs. (The remaining 3 percent would cover administrative costs.) 

The premise of RGGI is straightforward: put a price on emissions and companies looking toward their bottom line will reduce them. 

States that participate in the cap-and-trade market have endorsed that framework, accepting carbon prices as a feature, not a bug, of the system. But they have struggled to determine exactly how pre-existing contracts — those signed by emitters prior to the enactment of carbon pricing — should be handled.

Of the 10 states that participate in RGGI today, four have made some provision for such contracts. New York, New Jersey, Maryland and Connecticut have all at different times taken steps to protect power generators locked into long-term power contracts from absorbing large costs in the remaining years of their contracts. 

LS Power has argued that Virginia should do the same, contending it stands to lose about $42 million over the next five years because of four contracts it signed in 2016 and 2017. The generator has proposed that Virginia set up a reserve account from which eligible companies could purchase carbon allowances at 25 percent of the auction price for the next five years until their contracts expire. 

That, the company says, could save it some $32 million over the next five years. 

Bea Gonzalez, a lobbyist for LS Power, contended that such an accommodation is a matter of fairness, particularly because a 2017 carbon rule developed by the Department of Environmental Quality included a provision that would have covered the company’s compliance costs related to its pre-existing contracts.

“We’re asking for the allowances that we thought were contemplated in the work group,” Gonzalez told a Senate panel Feb. 18. “I’m willing to take anything at this point.”

Republicans have been sympathetic to the company’s stance, with Sen. Ryan McDougle, R-Hanover, arguing that LS Power’s recent $100 million investment in Hanover justifies cost reduction. 

“We have encouraged companies to come and locate in Virginia, build, spend their money,” he said in the Senate Feb. 11. “This is a very limited example of how the policy we are changing, relatively dramatically, is going to be very expensive to an entity.”

Sen. Siobhan Dunnavant, R-Henrico, agreed. “These contracts were entered into with a stable business environment with the expectation that they knew what the costs relevant to that investment would be,” she said. “By changing code this year, we are changing the game rules for them without the ability for them to renegotiate their contracts.”

But Democrats have resisted the measure, saying the state should not lose revenue because of a company’s lack of foresight, and that the losses would “blow a hole” in the funding Virginia has for coastal resiliency and energy efficiency. 

Carbon regulations have been discussed for more than 15 years, legislators and the administration have argued. RGGI held its first allowance auction in 2008, and in June 2016, then-Gov. Terry McAuliffe issued an executive order calling on the state to begin studying carbon reductions, noting that “electric companies are including carbon regulation projections in their long-term plans.” LS Power participated in an early work group and began including provisions to recover RGGI-related costs in its contracts in December 2018. 

“This is a very large, very sophisticated company with a plethora of lawyers and sophisticated utility regulation folks who made a bad decision,” Democratic Sen. Lynwood Lewis of Accomack, the RGGI bill’s Senate patron, told the chamber Feb. 11. “Nobody was unaware that this commonwealth was discussing the Regional Greenhouse Gas Initiative.”

The bill’s House patron, Majority Leader Charniele Herring of Alexandria, took a similar line in the Senate Appropriations Committee Tuesday.

“I think unfortunately the company made an error,” she said. “I don’t think Virginians should be in the spot of rescuing the company and losing some funds that could help us with resilience of our shores.”

An inconsistent stance?

Republicans on the Senate Appropriations Committee accused Democrats of being inconsistent in their willingness to accommodate private companies in establishing RGGI, pointing to two amendments made to the bill that would allow Dominion to recover its compliance costs from customers and would clarify who would be responsible for purchasing allowances in the case of a tolling facility, a plant that a buyer pays to operate. (Under a tolling agreement, a buyer provides the plant with the fuel it needs to run and then in return receives the energy it produces.) 

The Dominion amendment allows RGGI costs to be passed directly to customers, with no return for shareholders. Senior Vice President of Corporate Affairs and Communications Bill Murray has said the average customer’s monthly bill is likely to increase by $1.22 over the next five years. The State Corporation Commission has estimated bills will increase between $2 and $2.50 as a result of RGGI.

The second amendment stems from a dispute between the Tenaska tolling facility in Fluvanna and Shell, which takes its electricity. Despite Shell’s protestations, lawmakers added a provision to the RGGI bills that would make the buyer, rather than the tolling facility, responsible for auction allowance costs.

Republicans questioned why their colleagues across the aisle were willing to compromise on those measures but not with LS Power.

“I can’t get anyone to give me a good reason why we are treating [LS Power] differently than we treat Dominion Power and others,” Sen. Stephen Newman, R-Bedford, complained.

But Democrats have contended the situations are different. 

In an earlier discussion, Lewis pointed out that while other amendments would cost the state revenues, the Tenaska amendment has no impact on the state’s bottom line but only clarifies who is responsible for the costs.

And Dominion, said Sen. Jennifer McClellan, D-Richmond, as a regulated utility enjoys constitutionally mandated protections that allow it to recover its costs.

“Whether we tell the SCC how those costs will be recovered or not, those costs will ultimately be recovered,” she said Tuesday. “LS Power is in a different position. LS Power had the ability to negotiate a contract knowing the risk that Virginia would eventually, or could eventually join RGGI. The RGGI discussion, the possibility of joining RGGI, was out there when LS Power entered into that agreement.”

Noticeably absent from discussion was any mention of Spruill’s SB 992, a bill that would grant special allowances to two controversial natural gas plants being planned for Charles City County. That measure, Department of Environmental Quality Deputy Director Chris Bast has warned, could force the state to carve out almost 40 percent of its total allowances, worth about $131 million over three years, for the projects.

Democrats and Republicans on the Senate Commerce and Labor Committee advanced that bill unanimously. On its final Senate floor vote, it passed 27-13, with eight Democrats voting in its favor. Six Democratic senators who voted the bill out of committee voted against it on the floor. 

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Sarah Vogelsong
Sarah Vogelsong

Sarah is Editor-in-Chief of the Mercury and previously its environment and energy reporter. She has worked for multiple Virginia and regional publications, including Chesapeake Bay Journal, The Progress-Index and The Caroline Progress. Her reporting has won awards from groups such as the Society of Environmental Journalists and Virginia Press Association, and she is an alumna of the Columbia Energy Journalism Initiative and Metcalf Institute Science Immersion Workshop for Journalists.