Deregulated Power: Cheaper but Dirtier

The Paradise, Ky., electric power plant is no heaven on earth, at least in terms of its propensity for polluting the air. In fact, its coal-fired boilers are among the nation’s dirtiest, spewing noxious nitrogen oxides into the atmosphere at the rate of some 135,000 tons per year, according to data reported by the utility to the Environmental Protection Agency.

Unfortunately, operations at Paradise, built in 1963 and operated by the Tennessee Valley Authority, and similar coal-burning plants are not likely to shut down or even scale back any time soon. In fact, since the Federal Energy Regulatory Commission (FERC) implemented its so-called “open access” rule last year allowing utilities to compete with one another by selling power directly to customers, the danger exists that coal plants will operate at higher capacity, according to the EPA, and create even more pollution.

As states and the federal government break century-old monopolies over electricity generation and sales, power companies will no longer serve captive customers at regulated rates. FERC estimates that the open competition will save consumers some $5.4 billion a year in lower power bills. But the EPA warns that as utilities strive to compete by offering the lowest prices for electric power, they will expand operations at plants like Paradise and its coal-fired cousins, which are less expensive to operate because of low fuel costs and fewer investments in pollution-control equipment, but are dirtier than newer plants fired by natural gas. Some of the chemical contaminants produced by these coal-burners-which reside largely in the Midwest’s Ohio River Valley-will drift eastward on prevailing winds, settling on Mid-Atlantic and New England states, which are already struggling to reduce emissions.

Even before the new competitive climate, the electric-utility industry has been the biggest source of air pollution, exceeding motor vehicles in most cases. EPA figures show that power generators are responsible for 66 percent of all sulfur-dioxide emissions, 29 percent of all nitrogen-oxide releases, 21 percent of airborne mercury, and 36 percent of all carbon-dioxide emissions in the United States. While amendments to the U.S. Clean Air Act of 1970 cap sulfur-dioxide releases in both new and existing plants, hundreds of coal-burners built before 1970 are largely exempt from other environmental controls, including limits on nitrogen oxides. Moreover, some pollution that the plants release-such as mercury-remains totally unregulated.

These pollutants have adverse effects on human health and the natural environment. For example, nitrogen oxides, along with sulfur dioxide, combine with sunlight and other compounds to form ozone, the prime component of “smog” that damages lungs and stunts plant growth. Nitrogen oxides are also a chemical precursor of acid rain, which has harmed lakes, streams, and forests in the Northeast. And mercury is toxic to humans and animals alike.

Byproducts of Competition Henry Lee, director of the Environmental and Natural Resources program at Harvard’s Kennedy School of Government, says that Midwest coal plants now run at about 64 percent of capacity. Utilities previously had little incentive to operate the older plants at higher capacity because of regional energy surpluses and because they could simply pass on the added costs associated with their newer plants to customers. But as competition to offer the lowest prices heats up, utilities may run their coal-burners more. At the same time, consumer demand for power will likely rise if prices fall, according to Lee. “And as demand for Midwest power goes up, there’s a trade-off,” he says. “You can build new gas plants or you can utilize the coal plants more; my guess is it will probably be more of the latter.”

Lee estimates that even an annual 3 percent increase in the production of coal-based electricity by the year 2000-a likely scenario, he believes-would send nearly 500,000 more tons of nitrogen oxides into the atmosphere per year, or about an 8.2 percent increase over the rise in nitrogen oxide expected without competition. And emissions of carbon dioxide, the prime “greenhouse” gas blamed for global warming, he says, would rise by 43 million tons per year, or 7.8 percent over the projected rate without competition. Such increases could be enough to throw many states out of compliance with EPA regulations and likely cause factories that emit these compounds in those states to cut back or shut down operations.

Other researchers have reached similar conclusions. In a recent study for the EPA, the ICF Kaiser Consulting Group of Fairfax, Va., looked at the impact of electric competition on air pollution. The ICF study reports that as electricity prices fall, demand will rise, and power companies will crank out more electricity, leading to 362,000 tons more nitrogen oxide pollution from a 95.6 billion kilowatt hour boost from coal plants in the year 2000.

FERC, which governs interstate power deals, insists its 1996 “open access” rule will not cause more air pollution. But the EPA claims that the FERC model uses faulty assumptions about power prices and demand. When the agencies turned the dispute over to the President’s Council on Environmental Quality, which allowed FERC to move forward with competition, the council decided that the EPA’s concerns “deserve serious consideration” and that further air-quality regulation may be needed.

Meanwhile, some eastern states are tackling the problem by adopting pollution standards as part of their deregulation plans. Vermont’s proposed plan, for example, would require that companies selling power to the state hold emissions to 1996 levels. Regulators also hope that informed consumers will opt to buy power that is less polluting. Toward that end, Massachusetts, Rhode Island, and Vermont have all endorsed a plan to provide information on environmental emissions to customers.

But air pollution does not honor state boundaries, and the EPA is considering a national approach that uses market forces to control air emissions. The agency may try to establish a “cap and trade” program whereby the government would set an overall limit on the amount of nitrogen oxide that the utility sector is allowed to emit, and then allow plants to buy or sell pollution credits. The cap would be set nationally but also could be parceled out by region, or possibly by states. A cleaner power producer could then trade or sell its pollution allowance to a dirtier generator. A similar system is used by power companies under the Clean Air Act of 1990 to limit sulfur-dioxide emissions nationwide.