The EPA market manipulation switcheroo

Guest Blog | May 30, 2014 | Climate Change, Coal, Energy Policy

This guest blog was written by Tyson Slocum, the director of Public Citizen’s Energy Program, and was originally published on May 30 in The Hill.

There is a long history of using Environmental Protection Agency (EPA) rules as a catch-all conduit of culpability, a slight-of-hand smokescreen useful for setting up the agency as the dupe to mask the real reasons behind power plant shutdowns. A cardinal lesson in today’s hardnosed political theater is what’s true isn’t always believable, and what’s believable isn’t always true. The industry is spending a lot of money to have voters believe the EPA is the root of our energy problems — even though it isn’t true.

A favorite tactic is blaming the EPA for plant shutdowns when market manipulation is the culprit. For example, in 2001 when I was blowing the whistle on Enron during California’s electricity crisis, then-House Subcommittee on Energy and Air Quality Chair Joe Barton (R-Texas), along with Vice President Dick Cheney, argued that stringent air-quality regulations caused the price spikes and rolling blackouts, and drafted legislation to suspend Clean Air Act requirements as a solution, with Barton arguing that “one of the things that causes the problem … are some of the Clean Air Act regulations.” Of course, we at Public Citizen knew that the power shortages were the result of intentional capacity withholding by the likes of Enron. Power companies made billions of dollars shutting down power plants to increase the prices at which they could sell power at their remaining units. But in Barton and Cheney’s world, the EPA was an easy culprit.

Fast forward to the fall of 2013, when a private equity firm founded by Goldman Sachs veterans announced they would close a coal-fired power plant, Brayton Point, just five weeks after they closed on the purchase. The firm blamed the closing on the age of the plant and the environmental compliance costs required to keep the facility competitive. But in recent filings we made at the Federal Energy Regulatory Commission, we allege a more sinister reason: The firm stood to earn far more money timing the shutdown of the plant to coincide with a power auction, thereby more than doubling of the auction price, resulting in windfall profits for the firm’s five other power plants in the region. Again, publically blaming the EPA was believable, even if it wasn’t true.

Similarly, FirstEnergy announced in early 2012 that it would close several coal-fired power plants, again blaming the EPA. But closing the plants resulted in a price spike in PJM Interconnection’s base residual auction, with one Wall Street analyst predicting FirstEnergy would derive an extra $550 million in earnings from the resulting price spike. Capacity withholding, blamed on EPA regulations, can earn a power company a fortune in higher prices for their remaining operating units.

In June 2011, American Electric Power issued a press release claiming it was forced to close five of its coal power plants because of looming EPA regulations: “Because of the unrealistic compliance timelines in the EPA proposals, we will have to prematurely shut down nearly 25 percent of our current coal-fueled generating capacity [and] cut hundreds of good power-plant jobs.” But one week earlier, CEO Mike Morris didn’t mention the EPA as a bully when talking to Wall Street analysts on a conference call; rather, Morris touted how the closing of the power plants would save shareholders a bundle because the plants were old, inefficient and were dispatching less than 5 percent of the time. “As you know, those are high-cost plants and dispatch infrequently,” he told Wall Street, noting that some of the plants didn’t even turn on in 2009 because natural gas was so much cheaper. Closing the coal-fired power plants saved the company money, but closing the plants also led to layoffs and reduced local tax revenues. American Electric Power probably found it easier to keep local alliances strong by blaming the distant, big bad EPA than confessing to the true economic realities.

This pattern tells the story of how the industry reflexively turns to “blame the EPA” to mask the real reasons for closing fossil-fuel power plants.

Now the U.S. Chamber of Commerce is attacking pending EPA greenhouse gas rules for existing power plants, claiming through its new “Partnership for a Better Energy Future” (I wonder how many focus groups message-tested that gem?) that the rules to be unveiled June 2 cost too much and threaten reliability by forcing the closure of too many plants. But this alarmist smokescreen is not to be believed. The new EPA rules will actually be fairly benign, as utilities are going to have considerable flexibility in meeting the fairly modest greenhouse gas emission reductions, as energy efficiency, renewable energy and other types of rate base qualifying programs can qualify. As a result, states can design compliance plans that, in most cases, can lead to rate reductions for most household consumers.

The Chamber of Commerce will be spending a lot of money to trick Americans into believing that the EPA’s efforts to address climate change will do more harm than good. But that’s simply not true.

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