State regulations can cause problems too

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This week’s entry will digress from national policy issues to discuss several developments closer to home. We’ll begin with some background on Delaware policy re electric power, report on three juicy controversies, and offer some general observations.

A. Deregulation, well not exactly - The electric power industry in Delaware was traditionally regulated by the Public Service Commission (PSC). Legislation was enacted in 1999, however, which deregulated electric power generation and left regulation of interstate transmission charges to the Federal Energy Regulatory Commission. The PSC’s role was narrowed to regulating in-state distribution of electric power. Electric regulation in Delaware, Public Service Commission, 6/23/16.

These changes were presumably intended to result in lower electric power costs as the result of competition re power generation. Nearby states appear to be following a similar approach, with the exception of VA & WV. Energy deregulated states, Quantum gas & power services,

Deviating from free market principles, Delaware subsequently entered into a multistate compact called the Regional Greenhouse Gas Initiative (RGGI). Founded at the end of 2005,
RGGI was intended to cap and then reduce carbon emissions from electric power production in the name of combatting global warming. Nine states (DE, MD, NY, and the New England states) are currently participating.

RGGI’s overall carbon emission caps (reduced to 91 million tons in 2014 and declining 2.5% per year in ensuing years) are allocated to the participating states, which assume responsibility for meeting their respective commitments. Conventional electric power producers in the RGGI area are required to obtain carbon emission allowances, which can be purchased on an auction market. Delaware’s share of the sale proceeds flows primarily to the Sustainable Energy Utility (SEU), a nonprofit organization that funds energy efficiency, renewable energy, and other consumer benefit programs.

In addition to participating in RGGI, which is basically a tax on conventional electric power producers, Delaware subsidizes the production of electric power from “renewable” sources (defined as solar, wind, biomass, hydroelectric, qualifying fuel cells, etc., but not nuclear). DE renewable energy producers receive renewable energy credits, which they can sell on an auction market.

The applicable statute is the Renewable Energy Portfolio Standards Act (REPSA), which establishes a Renewable Portfolio Standard (RPS) for Delaware utilities. A 25% renewable energy requirement is being phased in: 11.5% 2014, 13.0% 2015, 14.5% 2016 . . . 25% 2025. Renewable Portfolio Standard, DNREC,

In compliance with the RPS, DE electric power distributors must acquire the requisite percentage of their volume from renewable sources or make up any shortfall with renewable energy credits (which are available for purchase on the auction market).

In 2011, the administration uncorked a plan for inducing a California-based fuel cell producer (Bloom Energy) to locate a manufacturing plant in Delaware. The magnitude of the contemplated incentives would have been politically unthinkable if presented as an expense for taxpayers; the solution was to structure the arrangement so that most of the cost would be borne by Delmarva Power ratepayers.

Step one was to amend REPSA to include Bloom’s fuel cells in the statutory definition of renewable energy (although the fuel cells would be powered by natural gas and are less efficient than state of the art gas-fired generators). Then the PSC was authorized to approve (and subsequently did so) a surcharge on electric power produced using arrays of Bloom fuel cells at facilities constructed and operated by Bloom or its assignee. The surcharge is to be payable by Delmarva Power customers for 21 years; the legislation provided that the surcharge cannot be reduced or cancelled without triggering a huge penalty payment (“poison pill”).

This wasn’t a purchase contract. Delmarva Power was only to act as a collection agent for the surcharge, and the electric power produced would be sold to the grid. Delmarva would be entitled to claim the surcharge amounts as renewable energy credits under REPSA, however, thereby reducing its other obligations under REPSA. At the time, the burden on ratepayers was substantially underestimated by state agencies and the media. Fuel cell boondoggle, SAFE newsletter
summer 2011 (third story, scroll down).

It was estimated that bills of individual ratepayers would increase by about $1.00 per month (total of $67 million over 20 years), with unspecified additional charges for business customers. [The actual cost for typical individual customers has been running some $4 to $5 per month.]

B. Several electric power consumers are challenging a Department of Natural Resources and Environmental Control [DNREC] regulation that had the effect of raising the price of carbon emission allowances.

In the early years of RGGI, carbon emissions in Delaware and other participating states declined faster than expected. This was due in large part to the fracking boom, which resulted in an abundance of cheap natural gas and encouraged a shift from coal-fired to natural gas-fired power generation.

The price of carbon emission allowances on the auction market tanked as a result of lower than expected demand, to the dismay of (a) those who were counting on a flow of “free money” to support supposedly desirable energy conservation and renewable energy projects, and (b) investors who faced losses on the allowances they had purchased.

State administrators associated with the RGGI decided to “fix the problem” by issuing a new RGGI Model Rule that slashed the regional carbon emission caps, e.g., from 165 million tons to 91 million tons for 2014, and also curtailed the ability of power producers to “bank” excess allowances they had previously acquired. Instead of seeking legislative changes to bring Delaware requirements into line with the revised regional caps, DNREC chose to issue regulations for this purpose (after conducting a public hearing, at which, among other things, the agency’s authority to proceed on its own was questioned).

David Stevenson (of Caesar Rodney Institute) and several other electric power consumers filed suit in January 2014. Although not challenging Delaware’s participation in RGGI per se, they claimed that DNREC had exceeded its authority by issuing regulations to bring Delaware’s requirements into line with the tightened RGGI goals.

The plaintiffs also maintain that this change was effectively a tax increase, which could not have been made by the General Assembly, under the Delaware Constitution, without a supermajority vote (3/5 of both houses).

The Court ruled that the plaintiffs had standing for their suit in September 2014, clearing the way for the case to proceed, and the plaintiffs subsequently moved for summary judgment on grounds that there were no material factual issues to be resolved. After several delays, arguments on this motion were finally heard in February 2016.

We concluded at the time that the judge was not disposed to invalidate the DNREC regulation. Consider some of the questions that he posed to the plaintiffs’ counsel.

Was it necessarily true that curtailment of carbon emission allowances had increased the electric power costs of the plaintiffs? Did they have power bills showing that higher rates had been charged as a result of the changes? What about offsetting benefits resulting from the distribution (by the SEU) and expenditure of these funds?

Granted that the participating states never formally amended the initial RGGI memorandum to cut the carbon emission caps, wasn’t this document effectively amended by their conduct? And as DNREC Secretary Colin O’Mara could have served as Delaware’s “designated representative” to sign an amendment of the memorandum (the original document was signed by Governor Ruth Ann Minner), why didn’t his approval of the DNREC regulations represent a valid substitute?

Re the constitutional claim, why did the carbon emission allowances represent a tax? True, the proceeds were earmarked for public purposes, but they were to be disbursed by the SEU and other entities without flowing through the Delaware treasury.

The inclinations of the Court were confirmed by the order denying summary judgment issued in April. Indeed, the Court severely limited its earlier ruling that the plaintiffs had standing to bring the case (footnotes omitted).

The parties are at a different phase of the litigation now. Summary judgment imposes a greater burden than does a motion to dismiss and the establishment of standing is plaintiffs’ burden to bear. Plaintiffs must establish standing with regard to their ability to attack the regulations as being beyond the scope of power granted the Secretary as well as to challenge the constitutionality of the action. Absent harm, the action will not proceed.

The case is not over yet, and perhaps the plaintiffs will ultimately prevail. This seems unlikely, however, because the Court is basically according the actions of an administrative agency a presumption of validity instead of requiring the agency to demonstrate that it was entitled to make major changes in a government program without legislative approval.

C. The Delaware Public Advocate is challenging a DNREC regulation that had the effect of averting a freeze in the phase-in of the RPS.

The General Assembly adopted amendments to REPSA in 2010, which, among other things, (1) raised the renewable energy percentage goal and extended the phase-in period from 2019 to 2025, and (2) authorized a freeze in the phase-in of the RPS if aggregate compliance cost was expected to exceed certain limits in a compliance year (3% of total retail cost of electricity for overall compliance, or !% of said cost for solar power compliance).

It was also provided that the PSC (not DNREC) would issue regulations re the declaration of a freeze, although this provision only explicitly refers to a solar power component in the overall equation. [Perhaps this was a drafting error, as Section 354(j), which is mentioned in the applicable provision, authorizes an overall freeze.]

For regulated utilities, the Commission shall further adopt rules and regulations to specify the procedures for freezing the minimum cumulative solar photovoltaic
requirement as authorized under § 354(i) and (j) of this title . . .

The PSC never issued regulations regarding a freeze, but DNREC did. After several false starts, the DNREC regulations were published in final form on January 1, 2016. The PA filed suit against DNREC on January 27, seeking a declaratory judgment that the DNREC regulations were unlawful. The PA was represented in this matter by an attorney from the Delaware Department of Justice. David L. Bonar v. DNREC, Supreme Court of the State of Delaware, case no. N16A-01-007 FSS.

The PA’s complaint offered four reasons for issuing a declaratory judgment that the DNREC regulations were unlawful: (a) DNREC (as opposed to the PSC) had no authority to issue the regulations; (b) fuel cell charges should have been included in REPSA compliance costs: (c) retail cost of electricity should have been limited to supply charges rather than including transmission and distribution costs; and (d) purported benefits from REPSA should not have been included as an offset to compliance costs.

One might have expected such a lawsuit, with one Delaware agency suing another, to attract a good bit of attention. So far, however, we haven’t noticed any media coverage.

One might also have expected DNREC to reconsider its position in light of the challenged regulation, but the agency is moving right along. Thus, a determination that the RPS would not be frozen has been published, together with a table purporting to show (while ignoring all four of the PA’s arguments) that REPSA benefits exceeded REPSA compliance costs by about a 2:1 margin. DNREC, director’s determination,

Although it’s hard to say exactly what the General Assembly intended when it enacted the “freeze” provisions in 2010, the approach taken in the DNREC regulations would have the effect of ensuring that a freeze in the RPS phase-in could not occur under almost any conceivable circumstances. This doesn’t represent a reasonable interpretation of the statutory provision, in our opinion, and it’s also unclear why the Court should need months if not years to rule on the matter.

Legislation specifying how the compliance cost percentage should be calculated has been introduced in the General Assembly, but HB 409 isn’t likely to pass this year and it shouldn’t be necessary anyway because the real problem is a failure to rein in the DNREC. The function of this agency should be to administer the laws of Delaware, not attempt to make them, and when in doubt the agency should call for legislative action.

D. The Bloom Energy fuel cell venture has survived every challenge to date, but now a candidate for governor has served notice that she will attempt to void this arrangement if elected.

The Bloom Energy fuel cell venture was sold as a way to create manufacturing jobs in Delaware, but its effects in that regard have been limited and the cost has been extraordinarily high.

Many Delawareans were opposed to the Bloom deal in 2011, including SAFE, but the administration was able to get this proposal approved and implemented with only perfunctory questioning from the minority party and the media. Bloomin’ tariff, SAFE newsletter,
Fall 2011.

Delawareans have filed several legal challenges against various aspects of the Bloom venture since 2011, none of which survived the first round of procedural objections. The wheels of justice, Conservative Caucus of DE newsletter,

•Civic activist John Nichols played a leading role in two cases against Bloom Energy. One case challenged DNREC’s approval of a power generation facility using Bloom’s fuel cells in the Delaware Coastal Zone (he is an avid sportsman and knows this area well); the second involved a US constitutional challenge to the imposition of a fuel cell surcharge on Delmarva ratepayers (of which he is one). It was ruled that Nichols lacked standing in both of these cases, go figure.

•Yours truly was the named plaintiff in a class action suit against Delmarva Power seeking damages because the Bloom Energy fuel cell operations are consuming more natural gas than the DNREC permit allows (with a corresponding increase in the qualified fuel cell provider surcharge). The complaint was dismissed on grounds that it should have been brought before the Public Service Commission, at which point the class action law firm lost interest.

Citizen legal challenges evidently weren’t going to work. And as previously noted, the fuel cell provider surcharge was protected by a poison pill provision in case the General Assembly ever had second thoughts. So was the fuel cell provider surtax destined to remain in effect for the full 21-year term, at a cost to Delmarva ratepayers of hundreds of millions of dollars? Seemingly yes, unless Bloom Energy was put out of business somehow.

Enter Lacy Lafferty, who is one of the Republican candidates for governor this year. In a recently published letter, she attacked the Bloom Energy deal as not simply misguided but blatantly fraudulent. Bloom Energy, enough is enough, News Journal,

Bloom misrepresented its product, its costs, its availability and reliability, its hazardous waste, and its benefits to the ratepayers in Delaware.

And if elected governor, concluded Ms. Lafterty, she would make every effort to set things right by voiding the arrangement in its entirety.

I promise to do everything I can by hiring the best attorneys to void Bloom’s 21-year contract at the cost of 700 million dollars, claw back the $130 million Bloom took from Delaware and return it to Delaware families.   Enough is enough of our government’s disastrous decisions and wasteful spending.

Is this a feasible plan? That’s unclear, but the Bloom Energy deal was abysmal and Lafferty should be commended for vowing to make the effort. Perhaps Delawareans should ask other gubernatorial candidates what they think about the matter.

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Summing up, the foregoing examples demonstrate several points.

First, complex schemes to regulate economic activity, with multiple players involved, can get pretty complicated. What exactly is the effect of this arrangement? Is that what the legislature intended? The best antidote is to avoid complex regulatory schemes in the first place and allow most economic decisions to be made by buyers and sellers in the free market. It’s called Capitalism.

Second, legal challenges to administrative action are slow and cumbersome at best, and there is a strong tendency to uphold government regulators on grounds that they are “the experts.”

Third, legislators try to have things both ways, e.g., by enacting supposedly beneficial programs without adequate attention to the costs. Extending Delaware’s RPS with a cosmetic “freeze” provision provides a classic example of how this works.

Conclusion: If the voters want better results, they should pay attention to what’s going on instead of relying on public officials to represent their interests.

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RGGI is typical leftist government interference with markets. Global Warming may be a lie, but it is grand politics. - SAFE director

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