Retooling regulation: Clean air and clean energy demand an integrated oversight regime
As utilities confront business model reforms, perhaps it's time for regulators to do the same
This guest post is the first in a four-part series from Ken Colburn and Chris James focusing on greater integration of energy and environmental regulation. Both authors are principals at the Regulatory Assistance Project. If you are interested in submitting a guest post, please review these guidelines.
Looking at the electric power industry today brings to mind the well-known April 1970 dispatch from Apollo 13: “Houston, we have a problem.”
Actually, we have several.
Prominent among them is the growing permeation of environmental issues into energy policy and energy issues into environmental policy. On the one hand, for example, the U.S. Environmental Protection Agency (EPA) has been characterized as trying to dictate state and national energy policy in recent rulemakings. On the other hand, the extraction, production, and consumption of energy has been characterized as producing the greatest environmental impact of any human activity. As it’s become more clear that energy and environmental issues are joined at the hip, it’s become less clear how state and federal energy and environmental regulators can integrate the fulfillment of their respective responsibilities to the public.
To make matters worse, the very regulatory structures underpinning these obligations are showing their age.
The electricity grid—the greatest engineering achievement of the 20th century—is being transformed by 21st century technology from the traditional regulated monopoly using centralized generation, transmission, and distribution to match customer demand, into a transactive system that manages demand as adroitly as supply, with much of its generation coming from distributed resources. The advent of active supply and demand in the electricity sector portends a future of competitive markets, eroding the historical justification for regulated monopolies, and by extension, possibly for energy regulators themselves.
The environmental regulatory framework also faces daunting challenges.
Over the last 40 years, air quality has improved markedly due to the Clean Air Act. According to the Office of Management and Budget, the Clean Air Act’s 22 implementing rules provide most of the benefits of all federal regulation, and some suggest that environmental regulation contributes to American competitiveness.
But here too, scientific and technological advances are straining statutory underpinnings. The Clean Air Act was crafted in an era of dose-response exposure models and limited detection capabilities. Now it’s clear that many pollutants have health impacts all the way to near-zero concentration, so no definitively “safe” level may exist. And sophisticated technologies can now detect pollutants at extremely low levels—parts per trillion—and even trace them back to their source. The Clean Air Act regulates air pollutants individually, yet controlling one contaminant can increase emissions of another. Further, the regulation of non-conventional pollutants like carbon dioxide could multiply the number of sources state environmental agencies regulate. These developments suggest a need to revisit Clean Air Act programs in order to reduce regulatory backlogs and enhance administrative efficiency.
As energy and environmental issues converge, state regulators charged with ensuring public health and welfare remain structurally and statutorily segregated, face greater technological change than ever, and often lack adequate resources. As the regulated community confronts the need for new business models, perhaps their regulators need to do the same.
Ike: Think Big
In circumstances like these, the advice of President Dwight Eisenhower may be helpful. He once said, “Whenever I run into a problem I can’t solve, I always make it bigger. I can never solve it by trying to make it smaller, but if I make it big enough, I can begin to see the outline of a solution.”
Following Eisenhower’s advice, some elements of an outline do take shape:
The environmental and health consequences of energy generation cannot be considered valueless “externalities.” But environmental mandates must also take into account energy reliability and cost impacts.
Air quality cannot be regulated effectively on a pollutant-by-pollutant basis. Sources emit multiple pollutants simultaneously; economies can be achieved by regulating them the same way.
Least-cost solutions require consideration of all resources—those that produce and deliver kWh as well as those that provide energy services using few or no kWh. In some cases, optimal solutions may require using more kWh (e.g., to electrify transportation or home heating) in order to improve “emissions efficiency.”
Public health and welfare can be impaired by too little regulation—or by too much. Smarter regulation that allows markets to reveal the true cost of electricity (e.g., through better rate design), eliminates the utility throughput incentive (e.g., via decoupling), and recognizes the multiple benefits of energy efficiency and clean energy (e.g., by streamlining evaluation, measurement, and verification of programs and other obstacles).
Regulatory plans need to incorporate future, as well as current, risks and benefits. Water issues are already of concern, and additional air quality and climate mandates are likely. But the grid is also getting cleaner, which must be factored into state implementation plans.
Absent action, today’s challenges are likely to worsen. While efficient technologies have caused stagnant or declining electricity demand, new loads are emerging through environmentally beneficial electrification. Working together, environmental and energy regulators can facilitate such developments.
Energy and environmental convergence will continue, whether intentionally and thoughtfully, or inadvertently and haphazardly. Behind every problem, though, is an opportunity. We believe a purposeful path toward greater integration is possible that could lead to better environmental outcomes from a cleaner, safer, more reliable, and affordable electricity system.
Specifically, RAP is developing a model process we’ve dubbed “E-Merge” to meld best principles from energy planning, such as long-term reviews of what energy resources are needed and most cost-effective, with environmental improvement more aligned to how people breathe and businesses operate.
Focusing on air quality and climate issues for now, E-Merge would have energy regulators, environmental regulators, policymakers, and stakeholders work together to define acceptable public health standards (or default to federal standards). Meeting those standards would, over time, limit the amount of air pollution allowed. The challenge of doing so can be addressed as a system optimization and risk reduction exercise, specifying as criteria the need to meet emissions limits for multiple pollutants, keep the lights on reliably, and do so at minimum societal cost. System dynamics techniques exist to analyze such situations and distill solutions. Naturally, they are not quick, easy, or cheap. But, fortunately, they are scalable, so directionally correct E-Merge efforts can be undertaken by regulators, with greater complexity introduced as needed.
As Eisenhower discerned, in order to address certain challenges effectively, you’ve got to think big. In the face of a swiftly evolving energy system and changing air-related public health requirements, broadening our collective field of vision—as the E-Merge process suggests—may provide a “bigger,” more effective path forward.
This is the first in a four-part series. Subsequent posts will elaborate upon:
How the E-Merge process would actually work (e.g., steps involved, etc.);
What obstacles states could face in conducting an E-Merge process and how they might be addressed; and
Where efforts similar or related to E-Merge have been undertaken around the globe, and what their results have been.