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EPW POLICY BEAT: GIVE AND TAKE
June 8, 2009

Posted by: Matt Dempsey Matt_Dempsey@epw.senate.gov

As the Washington Post editorial “Buried Code” noted on Sunday, Congress should read the Waxman-Markey global warming bill, which “contains regulations on everything from light bulb standards to the specs on hot tubs, and it will reshape America's economy in dozens of ways that many don't realize.”   EPW Policy Beat is wading through the 900-plus page bill, and finding some interesting provisions.

One of the more ironical provisions concerns merchant coal generators. More specifically, it’s aimed at the potential for merchants in a cap-and-trade scheme to reap windfall profits.  Under the bill’s allocation distribution, merchants receive about 5 percent of allowances.  That such allowances were freely given was considered to be a legislative “win” for the sector.   Yet, as stated on page 582, that “win” quickly turns into a loss.  The relevant section reads as follows:

“Not later than July 1, 2014, the Administrator, in consultation with the Federal Regulatory Commission, shall complete a study to determine whether the allocation formula under paragraph (3) is resulting in, or is likely to result in, windfall profits to merchant coal generators or substantially disparate treatment of merchant coal generators operating in different markets or regions.”

Such language conjures all sorts of messy questions, such as: how will EPA and FERC define a “windfall”?  What, exactly, does “likely” mean?  What about “substantially disparate treatment”?  We trust the regulatory solons will somehow divine these meanings to the great benefit of merchant coal plants. 

What’s even more interesting is that, in the event EPA and FERC make an “affirmative finding,”  EPA must “promulgate regulations providing for the adjustment of the allocation formula under paragraph (3) to mitigate, to the extent practicable, such windfall profits, if any, and such disparate treatment, if any.”  

“Adjustment”?  We suppose one could reach varying interpretations of this language, but we’re fairly certain it means merchant coal generators should assume fewer allowances once the EPA-FERC study is completed.  That’s because, in our view, there is a nontrivial chance EPA and FERC will make an “affirmative” determination of some sort, and that EPA will thereby decide to pick the merchants’ pockets.  As one hand giveth, the other hand taketh away.

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