Electricity and Regulation Terry Hagen University of North Dakota

1. Electricity and Regulation Terry Hagen University of North Dakota

2. What is your most important use of electricity? • Heating and Cooling • Food preservation • Preparing food • Entertainment • Production of goods and services

3. Coal Fired Electric Power is an Important Industry in North Dakota • Provides for 18,000 direct and indirect jobs • 2 million people in the upper plains states depend on lignite fired electricity for their low-cost, dependable power • Contributes significantly to North Dakota’s GDP

4. What are the costs associated with electricity production? • Capital Intensive Industry • Coal Extraction • CO2, SO2 and NOx emissions • Ash disposal • Resource Depletion: Although there are over 800 years worth of lignite available at current rates of usage (30 million tons/year)

5. Regulation Addresses Cost Issues in Electricity Markets • Reclaiming land after surface mining • Controlling prices to consumers • Issues related to greenhouse gas emissions • Issues related to pollution, i.e., particulate emissions, etc.

6. The North Dakota Public Service Commission and Coal Mining Jurisdiction: Goals • Mining is environmentally sound and adverse effects are minimized • Protect the public interest and protect private property • Return mined lands to beneficial uses • Restore productivity to premined levels

7. Why We Regulate: ND Indian Head Mine Before Reclamation

8. What if there was no reclamation? • The land would not go back to the way it was • There would be no topsoil to revegetate which would lead to sparse vegetation • The water that pools in the holes would likely not support wildlife due to impurities in the water from the waste left behind

9. So We Reclaim the Land!ND Indian Head Mine After Reclamation

10. North Dakota Public Service Commission Electric Industry Jurisdiction • Other than reclamation: Tasks include safety, maintaining service territory, facility siting and regulation of rates for Investor- Owned Utilities • REC’s and Municipals are exempt from rate regulation because, theoretically, the owners are the customers and they will self monitor the industry

11. Other Costs of Electricity Production • CO2, SO2,Nox emissions and potential climate issues which lead to social costs • Social costs are hard to enumerate; it is not known for sure how severe they are • Some say greenhouse emissions will result in major increases in global temperatures and some estimates say the increases will be relatively minor

12. Ash Disposal • Fly Ash is recycled and used in concrete and road construction • About 40% of North Dakota Fly Ash is recycled • There have been some attempts from anti-coal activists to have it declared a hazardous waste which would make disposal difficult and expensive

13. Regulation of Rates and Rate Design is based on: • Cost Functionalization • Cost Classification • Allocation methods by customer class • Rate design guidelines • Specific rate design for each customer class

14. Residential Customer’s Functionalized Cost

15. Large Industrial Customer’s Functionalized cost

16. Cost Classification and Allocation Methods

17. Rate Design Guidelines • Rates should be specific to the customer class. Example: Residential customers should not be paying high prices to cross subsidize industrial customers. Rate design based on functionalized cost • New rates should avoid rate shock • Rates should not cause customers to switch to other fuels

18. Rate Case Specifics • Determine revenue requirements, work in progress, working capital, fuel procurement, cost of fuel and operating expenses • Analyze capital structure and cost of capital • Cost of service and rate design

19. Other PSC Jurisdictional Tasks • Safety requirements for all electric service providers • Resolution of territorial disputes between electric service providers • Siting of energy conversion and transmission facilities, wind farms, etc.

20. U.S. Electric Power Usage is Increasing Source: Energy Information Administration

21. Sources of New Electric Power Electricity Generation by Fuel Billion Kilowatt Hours Source: EIA, Electricity Generation by Fuel

22. Regulatory Agencies define and implement regulations to minimize costs to society • Most regulation is through command and control • Technologies are imposed on industries to reduce pollution • Under current Administration, EPA and the State of North Dakota are typically at odds over regulatory oversight. Ex. NOx emission technology (Regional Haze)

23. Future Regulatory Issues • Massachusetts vs. EPA • Greenhouse Gases have been declared a threat to public safety which led to the Tailoring Rule, now being litigated • April 12, 2012, EPA published New Source Performance Standards – no more than 1,000 lbs. of CO2/megawatt hour for new power plants

24. Future Issues (Cont.) • Conventional coal-based power plants produce twice that amount of CO2 • New plants using coal will have to include carbon capture technology – currently 50 percent more costly than a conventional coal-based power plant – to capture and store CO2 in underground geological structures

25. Effect on Family Budgets • This new regulation will force families to cut back on other spending. ( See Family Budget Activity)

26. Greenhouse Gas Reductions • How much environmental good will be done by the U.S. and Europe if we reduce GHGs? • An argument could be made that what little the U.S. and Europe reduce GHGs would be miniscule compared to the increases in GHGs by China, India and other developing countries • China burns 3 billion tons of coal annually; U.S. burns 1 billion (Balloon Demo)

27. Cost of Reducing GHG’s • The EPA’s new CO2 rules are likely to be very costly to consumers, electric and otherwise • Some estimates place all the new regulatory regimes at approximately a $1 trillion dollar reduction in GDP/year to Europe and the United States • The consumer will be squeezed by increasing energy costs and will need to cut back on other spending

28. Positive vs. Normative Arguments • Economists tend to set moral imperatives aside when solving problems. (Positive argument) • The current narrative is based on the moral imperative (Normative argument) that it is immoral to pump greenhouse gases into the atmosphere when it may do harm to future generations

29. Too little too late? • No matter how much we reduce emissions it may have little effect on climate change so some radical new thinking may be needed at some point in the future • Given the likely response from developing countries (i.e., Dramatic Third World increases in GHG emissions) we may need to respond by cooling the earth some other way

30. Geoengineering • Mt. Pinatubo blew in 1991, SO2 and particulates cooled the earth. How about an artificial volcano? • Stratospheric aerosol injection may be one radical but plausible answer to cool the earth on purpose to reduce the effects of Global Warming. Cloud Brightening may be another • Check out the video “COOL IT” on Netflix