John Locke Update / Research Brief

Coal-ash settlement: Why did they all agree to it?

posted on in Economics & Environment, Law & Regulation
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Several questions surround the coal-ash cleanup settlement agreement between Gov. Roy Cooper’s Department of Environmental Quality (DEQ), several “Community Groups,” Duke Energy, and not electricity consumers. The agreement focuses on six facilities — Allen, Belews, Cliffside/Rogers, Marshall, Mayo, and Roxboro — that had been classified as “low risk” sites under the Coal Ash Management Act. That classification meant Duke could consider much lower-cost options for their closure than full excavation.

Some of the questions include:

What’s the right closure method to adopt at each site: full excavation and removal of the coal ash to a lined landfill, draining and capping the basin in place, stabilizing it permanently, or a mix of options?

Also, what difference would the choice in closure method make for public health? For stakeholder earnings? For consumer power bills?

In a sudden turn on April 1, 2019, DEQ  announced there was only one answer supported by science to protect the public: full excavation and removal. That was when DEQ ordered Duke to submit plans for full excavation of the six facilities.

DEQ’s press release about the order announced:

… DEQ has determined excavation of all six sites is the only closure option that meets the requirements of Coal Ash Management Act [CAMA] to best protect public health. The coal ash must be disposed of in a lined landfill.

“DEQ rigorously reviewed the proposals, and the science points us clearly to excavation as the only way to protect public health and the environment,” said DEQ Secretary Michael S. Regan.

According to Duke, scientific analysis showed that whichever closure method was chosen, the benefits for public health would be essentially the same. Full excavation and removal would, however, be much, much costlier and take considerably longer, too. For basically the same environmental results, those costs that would be unnecessary to shareholders and consumers.

As Duke announced in its press release explaining that it was contesting DEQ’s order to the Office of Administrative Hearings:

NCDEQ’s determination that excavation is “more protective” – a determination made without the benefit of complete closure plans and corrective action plans required by CAMA – is inconsistent with the scientific analysis submitted to the state regulator demonstrating that groundwater quality at the six sites is predicted to be virtually the same under all closure options.

The order, as currently written, could result in approximately $4 billion to $5 billion in additional and unnecessary costs, potentially create decades of disruptions to local communities, and will increase rather than mitigate environmental harm.

“We do not want our customers and communities burdened with billions in additional costs and decades of disruption when the science shows no equivalent environmental or public health benefit to excavating these sites,” said [Stephen De May, North Carolina president, Duke Energy]. “There are common-sense, case-by-case closure options available that will continue our significant progress in safely closing all our ash basins.”

On the question of costs to shareholders and consumers, DEQ was guarded. WRAL reported that “[DEQ Secretary Michael] Regan said it’s up to the Utilities Commission and the Attorney General’s Office to decide who should pay for the cleanup.”

Regan said, “The assumption that the public should pick that tab up, I don’t think is one that we should make prematurely.”

Consumers would seem justified in thinking they would be fairly protected from rate hikes to recompense Duke for the coal-ash cleanup. Gov. Cooper had expressed opposition to the idea, going back to 2014 when he was attorney general preparing to run for governor. Cooper described passing the coal-ash cleanup costs down to the consumer as unfair and urged legislators “to prohibit the [Utilities] Commission from authorizing utility rate increases related to these costs.”

Also, Attorney General Josh Stein was already in the midst of a challenge against a June 2018 rate hike awarded to Duke for $475 million in coal-ash cleanup costs. Stein voiced concerns about consumers being saddled with costs unfairly rather than sharing them with Duke shareholders. As reported by The Charlotte Business Journal,

Stein acknowledges that customers should pay some part of the costs of upgrading the utility’s coal-ash ponds to meet new state and federal environmental standards. But the commission order holds customers liable for essentially all of those costs.

Seventy percent excavated — with costs passed through to consumers

Against that backdrop, consider the settlement agreement of Dec. 31, 2019. The settlement agreement resulted in lots more costly excavation than Duke thought was necessary, but not full excavation, which DEQ and the community groups thought was the only way to protect public health. It would have excavated and removed 70 percent of the coal ash identified at those six facilities, leaving 33.8 million tons of coal ash in the ground out of 113.5 million tons. So why did they all agree to it?

The answer on Duke’s part is easier to see: the settlement agreement explicitly allows the costs to be passed through to consumers. The shareholders would be protected. Avoiding complete excavation trimmed the forecast $4 billion to $5 billion in additional costs by $1.5 billion.

In Section 53, “Stipulations Between Only the Parties to this Agreement Regarding Rate Recovery Proceedings,” DEQ and the community groups agreed that Duke’s costs in closing and excavating the coal-ash sites in the agreement are “reasonable, prudent, in the public interest, and consistent with law.” Importantly, DEQ and the community groups agreed not to challenge or even object in court or before an administrative body (such as the Utilities Commission) “the reasonableness, prudence, public interest, or legal requirement for Duke Energy to comply with the obligations imposed by this Agreement.”

For the Utilities Commission to allow Duke to pass through costs like coal-ash cleanup down to consumers, state law requires those costs to be “just and reasonable and prudently incurred.” Section 53 is there specifically to tell the Utilities Commission to give Duke rate increases to pass those costs through to consumers.

One could take the easy way out and act as if this was all Duke’s idea. See, for example, the WRAL editorial cartoon depicting Duke gleefully shoveling coal ash while extracting money from ratepayers’ pockets. But that’s forgetting Duke had contested the excavation order because it would leave “customers and communities burdened with billions in additional costs and decades of disruption” unnecessarily. DEQ forced higher-cost cleanup as the “only way,” then backed off that position some in the settlement agreement.

That leaves trying to figure out why DEQ and the community groups agreed to the settlement. They agreed to less protection of public health than what they had declared necessary (“the only way to protect public health and the environment”). On top of that, they agreed to leave no safeguard for the public as consumers, but instead to approve of legal language to justify passing through the cleanup costs to consumers via rate increases.

Consumers, meanwhile, were shut out of the process after having been given false hope about being protected from unfairly increasing rates. We were left with little to no recourse at all. Again.

Jon Sanders is an economist studying state regulations, that spreading kudzu of invasive government and unintended consequences. As director of regulatory studies and research editor at the John Locke Foundation, Jon gets in the weeds of all kinds of policy… ...

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