new units, entering into long-term power contracts, or other steps.75 For example, in 2012, the Georgia Public Service Commission reached a decision in its proceedings to review Georgia Power Company’s plans to retire certain generating units and purchase power from other sources to address, among other things, state pollution regulations and MATS. In addition to its other rulings, the Georgia commission approved three of the four power purchase agreements, indicating that such a decision represented the best balance of increased cost to consumers with the benefits of having additional capacity.76
In restructured markets, where the prices consumers pay for electricity are influenced by prices set in competitive, organized wholesale markets, the competitive nature of these markets provides an incentive for power companies to ensure that their investment decisions are cost-effective. In these markets, investors in the power company bear the risk associated with these decisions—the installation of any controls that turns out to have been unnecessary or too costly may not yield the additional revenue needed to pay for the investment. In addition, to ensure these markets remain competitive and that prices reflect the cost of producing electricity, FERC officials told us that RTOs and FERC have processes in place to identify, investigate, and prosecute manipulative behavior in wholesale electricity markets, as well as to ensure that prices are set in well- functioning markets representing the interplay of supply and demand. Several stakeholders we spoke with said these processes should be effective at keeping power companies from using actions they may take in response to the EPA regulations as an opportunity to manipulate the electricity markets.
However, these tools in traditionally regulated and restructured markets do not limit power companies from passing on to consumers any
legitimate costs they incur in responding to the EPA regulations, such as 75There is considerable variation in the tools employed by state public utility commissions to oversee the electricity industry. For example, integrated resource planning, generally a feature of traditionally regulated markets, is not uniformly used in all traditionally regulated states and may also be used in restructured states.
76Georgia Power Company also sought approval for initial expenditures related to the installation of fabric filters on some of its units. The Georgia commission approved expenditures associated with the initiation of construction of the fabric filters and required monthly compliance reports on the fabric filter installations until the matter can be reconsidered in Georgia Power’s 2013 Integrated Resource Plan.
the costs of installing controls, procuring CSAPR allowances, constructing transmission lines to address reliability challenges, and acquiring power from other sources to compensate for retiring generating units. Two of the state public utility commission representatives we spoke with from
traditionally regulated markets said it would be unlikely for a public utility commission to deny cost recovery for prudent investments needed to respond to these EPA regulations. In restructured markets, power
companies will attempt to recover the costs they incurred in responding to the regulations through the electricity markets. To the extent that price increases are the result of prudent steps in response to the EPA regulations rather than market manipulation, federal or state regulators may have little authority to mitigate them.
EPA has designed the regulations with some provisions that provide flexibility and allow power companies to minimize the costs of responding to them, which may reduce consumer electricity price increases. For example, by making CSAPR allowances tradable rather than requiring all generating units to individually meet a particular emissions threshold, EPA may enable power companies to achieve overall emissions limits at a lower cost.77
In addition, some tools could lower demand for electricity, which may offset potential price increases. For example, some states have provided incentives for consumers to purchase more energy efficient household appliances as part of an effort to avoid constructing additional generating units. Furthermore, electricity pricing and other programs can encourage customers to adjust their usage in response to changes in prices or market conditions, which can affect reliability. These programs are collectively referred to as “demand-response” programs, and two types— ”market-based pricing” and “reliability-driven”—are in use. Market-based pricing programs enable customers to adjust their use of electricity in response to changing prices. Reliability-driven programs, on the other hand, enable system operators to request that customers reduce
Additionally, EPA requested public comment on several regulatory provisions in the proposed CCR regulation which, according to EPA officials, could help lower industry compliance costs and reduce price increases.
77According to EPA’s estimates of the proposed CSAPR regulation, allowing allowance
trading may lower the costs of achieving emission levels required by CSAPR by over 23 percent compared to a scenario where each generating unit is required to meet its own emissions targets.
electricity use when needed, such as if hot weather or system
malfunctions mean that demand will probably exceed supply and cause a blackout. In August 2004, we reported that demand-response programs promote greater efficiency in supplying electricity by postponing the need to construct new generating units and reducing the need to use the generating units that are the most costly to operate. We recommended that FERC consider the presence or absence of demand response when making key decisions about electricity markets, including whether to allow some buyers to participate in wholesale markets.78 In response to our recommendation, FERC has taken steps to facilitate broader use of demand-response programs among RTOs.
Tools available to industry and regulators may also help address many, but not all, potential reliability challenges. For example, planning, market, and operational tools used by system planners and operators to ensure the availability of adequate transmission and generation will help address many potential reliability challenges associated with these regulations. System planners and operators, whether RTOs or individual power companies, manage the electricity system in accordance with NERC reliability standards. With respect to transmission, system planners compare the long-term demand for electricity at various points throughout the system to the location, capacity, and operating limits of generation and transmission resources. These activities require timely information on, among other things, planned retirements and new additions. EPA provided one mechanism through which system planners may receive this information in a more timely way when it instructed power companies seeking Clean Air Act administrative orders—orders to give units up to an additional year to come into compliance with MATS—to provide
compliance plans to system planners. In addition, some RTOs have begun requesting that power companies in their regions voluntarily provide early information on their plans to respond to the regulations, including planned retirements, retrofits, and operational changes. With respect to generation, system planner activities vary, with some areas of the country planning their future investment in generation and others using market-based approaches to encourage the development of new generation. System operators take more immediate actions to ensure the
78GAO, Electricity Markets: Consumers Could Benefit from Demand Programs, but
Challenges Remain