of Regulatory Utility
1101 Vermont Ave, NW
Washington, DC 20005
Task Force on
NARUC supports the use of market mechanisms to reduce greenhouse gas (GHG)
emissions in an economy-wide effort through a well-designed federal policy. A cap-
and-trade program is one option for achieving this goal. This issue paper lays out
NARUC’s position on the key questions of how CO2 allowances should be allocated
and how allowance value should be used if a cap-and-trade system were to be
adopted for GHG reduction.
Auction vs. Free Allocation
NARUC believes an auction is the most efficient means of distributing emissions
allowances, but we support free allocation of some allowances during a transition
period. In particular, we support a transitional allocation of allowances at no cost to
the electric sector in order to provide a funding source for energy efficiency programs
and to allow some cushioning of economic disruption caused by increased costs of
meeting GHG limits.
Allocation of CO2 Allowances to the Electric Sector: Who
Should Receive Them?
In order to prevent windfall profits, any no-cost allowances for the electric sector
should be allocated exclusively to regulated Local Distribution Companies (LDCs)
on behalf of consumers, rather than to generation owners or load-serving entities
(LSEs). State public utility commissions are obligated to account for the receipt of
valuable allowances as utility income. Only allocation to LDCs ensures that allow-
ance value will be used for public purposes rather than to enhance the profits of some
generation owners or LSEs, which may operate in unregulated markets. Furthermore,
only allocation to LDCs brings about equitable treatment of electricity consumers in
States with different regulatory structures.
In States where the wholesale price of electricity is determined by an organized mar-
ket process, generation owners will be able to pass on climate-re