How a power giant profits from greenhouse regs

No electricity source emits as much greenhouse gas as coal, and no power company uses as much coal as American Electric Power. So why is AEP lobbying for the climate-change legislation restricting greenhouse emissions?

AEP emphatically endorsed the American Clean Energy and Security Act last week in a public letter signed by Michael Morris, its chairman, chief executive officer, and president. In its second-quarter lobbying report, AEP wrote that it was “for and against various provisions, generally in favor.”

The bill in question — also called by its initials, ACES, or by its House sponsors, Waxman-Markey — places a national cap on greenhouse-gas emissions from many industrial sources. In effect, this adds to the cost of burning coal.

“Without this bill, without a strict regime for controlling carbon emissions, Big Oil and Big Coal win,” said Rep. Lynn Woolsey, D-Calif. “And the environment, endangered species, our kids, our grandkids, you, and I will be the losers.”

Got that? It's Big Coal against the children.

AEP, however, qualifies as Big Coal. One of the biggest electricity producers in the country, AEP generates more than two-thirds of its electricity by burning coal. Many years, the company is the Western Hemisphere's largest consumer of coal.

So how come AEP is on the same side as Woolsey, Reps. Henry Waxman and Edward Markey, not to mention “our kids” and the “endangered species”?

The reason has little to do with kids and everything to do with self-interest: Waxman-Markey, if it passes the Senate in similar form, could profit AEP at the expense of its customers and probably smaller competitors.

The bill requires many businesses to “pay for” their GHG emissions with permits, also known as “carbon credits,” whose supply is controlled by the government. Waxman-Markey would give away 85 percent of the credits initially, allocating the credits among different industries. AEP, a diverse company, might be able to tap three of the bill's piles of free credits — the 30 percent going to electricity distributors, the 2 percent going to electric utilities, and the 5 percent going to merchant coal generators.

While AEP would get credits for free, that doesn't mean they're worthless. If the company has more credits than emissions, AEP could sell these credits to needy companies. That means Waxman-Markey could spell profits.

Also, because much of AEP's business is as a regulated utility — meaning it effectively faces no competition, and the state government sets its rates — some of its costs can be passed onto consumers.

Morris told Forbes that Waxman-Markey would benefit the company. Morris said, “I'll have both enough allowances and I will have created or bought enough offsets to handle” the smaller emissions reductions the bill would mandate. He added: “I'll probably be putting capital to work on carbon-capture and storage technology … because the current climate bill includes substantial incentives for early carbon capture.”

Morris predicted rate increases of between 30 and 50 percent in the long run, which the company couldn't impose without the clean-energy or carbon-capture investments that Waxman-Markey would subsidize. “So for my business it's good as long as my customers don't leave,” which he doesn't expect to happen.

There are other angles to AEP's embrace of Waxman-Markey. Richard L. Sandor sits on AEP's 12-member board of directors, and he is also the chairman and CEO of the Chicago Climate Exchange. CCX is a for-profit company that serves as the trading floor for carbon credits, which is fairly slow business these days, as there are no mandatory carbon caps in the United States.

But if Waxman-Markey becomes law, the CCX will be the heart of carbon-trading action.

AEP's interest in Waxman-Markey — in crafting fine print and ensuring its passage — helps explains the company's eleven-fold increase in lobbying. From 1999 through 2007, the company averaged less than a million dollars in annual lobbying expenses. Since the beginning of 2007, AEP has spent almost $1 milllion on lobbying every month — $16 million over the last six quarters.

AEP officials say this lobbying, although it will boost rates, isn't against its customers' interests. The Environmental Protection Agency will regulate GHGs if Congress doesn't, they say.

Although Congress could block EPA regulation if it wanted to, AEP argues that greenhouse-gas regulation is inevitable — and that the lobbyists' job is to make sure that regulation is profitable for AEP.

Timothy P. Carney, The Examiner's lobbying editor, can be reached at tcarney@washingtonexaminer.com. He writes an op-ed column that appears on Friday

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