Utility Business Customers to Feast on Free Allowances

More than three-fifths of the value of emission allowances that House-approved climate change legislation would give to electric and natural gas utilities to soften the impact of higher energy prices on consumers would go to utility business customers, which would keep much of these revenues as profit rather than passing them through to their own customers, an analysis by the Center on Budget and Policy Priorities (CBPP) concludes.

The analysis by the CBPP, a respected think tank that focuses on fiscal policy and public programs that affect low- and moderate-income families and individuals, draws heavily on Congressional Budget Office (CBO) studies of the cost impacts of the legislation (H.R. 2454).

The CBO has concluded that 63% of the value of utility allowance allocations would go to the utilities’ business customers, while households would receive 37% of the value.

But the CBO also has determined that businesses would use the value of the allowances they would receive not to lower prices for their customers but to boost their own bottom lines, with the resulting increases in profits going to owners and shareholders. This outcome explains why the CBO has concluded that the impacts of higher energy prices expected to result from the legislation would fall hardest on moderate- and middle-income households, while high-income households would get a much weaker blow.

The legislation, sponsored by House Energy and Commerce Committee Chairman Henry Waxman (D-Calif.) and Rep. Edward Markey (D-Mass.), would give 30% of the total pool of emission allowances to electric local distribution companies (LDC) and gas LDCs, and directs these distribution companies to use the allowances “directly for the benefit of retail ratepayers.”

The bill also requires that LDCs divide the benefits of the free allowances they receive between their residential and business customers in proportion to the electricity and natural gas they deliver to these customers. Thus, utility business customers would receive nearly two-thirds of the allowance value, while residential customers would get a bit more than a third of the value.

But the CBPP report notes that the legislation stipulates that when LDCs pass the benefits of their allowance allocations through to customers as a rebate or other form of bill reduction, the benefit should be provided to the maximum extent practicable on the fixed portion of the bill—reflecting the costs of transmission infrastructure needed to deliver the energy—rather than being based on the quantity of electricity or gas consumed by the customer.

This requirement is intended to ensure that the allocations don’t mask the carbon price signal the bill would establish, and thus provide an incentive for customers to reduce their energy consumption and lower the emissions associated with this consumption.

But as the CBPP noted, a basic economic principle holds that firms typically pass through to customers any changes in the businesses’ variable costs, but do not pass through changes in fixed costs. Thus, because the rebate would be attached to the fixed cost portion of the bills, businesses likely would keep the rebate as profit rather than pass it through to customers.

The CBO estimated that 63% of the allowance allocation given to LDCs to benefit their business customers would ultimately go to households in the top income quintile.

“CBO has concluded that this increase in profits will primarily benefit the high-income households who own or hold stock in these firms,” the CBPP analysis said. “As a result, under CBO’s estimates, the distribution of benefits from the bill’s large allocations of allowances to LDCs would be highly regressive.”

The CBO reported in June that if the Waxman-Markey bill were enacted into law, the average net cost to U.S. households would be about $173 per year. However, different income groups would see markedly different cost impacts.

Because the bill allocates 15% of the total allowance pool to low-income households, the lowest-income quintile would see net incomes increase by $40 per year, while the second-lowest quintile would see a cost increase of $40 annually, CBO said.

However, the middle quintile of households—which represents middle-class America—would see net annual cost increases of $235, while the second-highest income quintile would see an increase of $340 per year.

The highest-income quintile would see a net cost increase of $165 per year, and because this group’s incomes are so high, they can absorb this additional cost far more easily than the middle-income quintile can, CBPP said.

Chad Stone, chief economist for the CBPP, said the Senate should consider reapportioning the benefits so that more of the allowance value the bill would direct to business customers goes instead to moderate- and middle-income households.

“The really good thing in the House bill is the 15% allocation for low-income households, and that should be preserved,” Stone told The Energy Daily. “If the Senate wants to extend direct consumer relief further up the income scale, they need to find more allowance value. The LDC allocation benefiting business is a good place to look.”

The center has consistently argued that direct consumer relief, through tax credits and existing federal benefit systems, has a number of advantages over free allocations to LDCs, particularly because direct consumer relief can be targeted to low-, moderate- and middle-income households to ease the pain of higher energy prices.

“Direct relief would cushion households from the loss in purchasing power that would result from higher energy prices while preserving their incentives to conserve energy and invest in energy efficiency improvements,” the analysis concludes.

—Chris Holly ([email protected]) is a reporter for COAL POWER’s sister publication, The Energy Daily.