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Stevenson v. Delaware Dent. of Nat. Resources & Environmental Control

Superior Court of Delaware

June 26, 2018

Stevenson, et al.
v.
Delaware Dent. of Nat. Resources & Environmental Control, et al,

          SUBMITTED: March 14, 2018

          Richard L. Abbott, Esquire, Attorney for Plaintiffs.

          Ralph K. Durstein, III, Esquire, Department of Justice, and Valerie S. Edge, Esquire, Department of Justice, Attorneys for Defendants.

          DECISION AFTER TRIAL

          STOKES, J.

         Dear Counsel:

         Enclosed please find a copy of my decision after trial issued in the above-captioned matter.

         Pending before the Court is the attack of plaintiffs David T. Stevenson, R. Christian Hudson, and John A. Moore ("plaintiffs") on the amendment of regulations originally enacted pursuant to Delaware's Regional Greenhouse Gas Initiative and CO2 Emission Trading Program Act ("Delaware's RGGI Act" or "Delaware's RGGI"). Plaintiffs' standing to pursue this matter has been a substantial issue since the complaint was filed, and the burden is on them to establish financial harm as a result of the amended regulations. Plaintiffs, however, have not established the probability of any financial harm to them. Furthermore, they have not addressed a most important factor: whether success in this litigation most likely would result in a decrease in their electricity prices, assuming they could establish an increase occurred because of the amended regulations. Instead of seeking to correct an actual harm, plaintiffs arc officiously meddling with Delaware's RGGI Act. Because plaintiffs have not established they have standing to pursue this action, the case is dismissed.[1]

         Background Information on the Amended Regulations[2]

         Delaware's RGGI Act resulted from the State's participation in the Regional Greenhouse Gas Initiative ("RGGI"). Before December, 2005, environmental representatives of some states in the Mid-Atlantic (including Delaware) and in the Northeastern regions met to discuss the effective regulation of greenhouse gas emissions from coal and other fossil fuel power plants. The RGGI Program was developed. A brief summary of the RGGI Program appears in the DNREC's Secretary's Order No.: 2013-A-0054:

The RGGI Program is the nation's first mandatory, market-based program to reduce emissions of carbon dioxide (CO2), the principal human-caused greenhouse gas. The States participating in RGGI... have established a regional cap on CO2 emissions from the power sector, and are requiring power plants to possess a tradable CO2 allowance for each ton of CO2 they emit.
This competitive carbon dioxide emissions trading program reduces CO2 emissions from large coal and other fossil fuel fired electric generating units (units producing more than 25 Megawatts of electricity) in Delaware and the eight other States ... by establishing a regional cap on the amount of CO2 that power plants can emit through the issuance of a limited number of tradable CO2 allowances. These large polluting power plants are required by each Participating State's regulations to have and surrender one RGGI allowance for every tor of carbon dioxide they emit into the atmosphere. The Participating States make allowances available to generators through a[n] ... auction process. The proceeds from those auctions are returned to ratepayers in each state through energy efficiency investments and other clean energy programs.[3]

         RGGI's goal to reduce greenhouse emissions caused by fossil fuels is accomplished several ways. The allowances' added costs to the more intensive carbon-fuel generators cause the less carbon-intensive energy generators and the non-carbon energy generators to be competitive and thus, to be awarded the clearing prices on the wholesale market. The goal also is accomplished by an investment of the proceeds from the purchased allowances into energy-efficiency programs, thereby reducing the demand for electricity.

         The states participating in the RGGI Program entered into a Memorandum of Understanding ("MOU") in December, 2005. The overall goal of the RGGI Program is set forth in the MOU as follows:

The Signatory States commit to propose for legislative and/or regulatory approval a CO2 Budget Trading Program (the "Program") aimed at stabilizing and then reducing CO2 emissions within the Signatory States, and implementing a regional CO2 emissions budget and allowance trading program that will regulate CO2 emissions from fossil fuel-fired electricity generating units having a rated capacity equal to or greater than 25 megawatts.[4]

         The MOU established the regional base annual CO2 emission; budget at 121, 253, 550 short tons.[5] It further established Delaware's initial base annual CO2 emissions budget at 7, 559, 787 short tons.[6] The MOU also states that "[f]or the years 2009 through 2014, each state's base annual CO2 emissions budget shall remain unchanged."[7] The MOU further provides:

Scheduled Reductions. Beginning with the annual allocations for the; year 2015, each state's base annual CO2 emissions budget will decline by 2.5% per year so that each state's base annual emissions budget for 2018 will be 10°/c below its initial base annual CO2 emissions budget.[8]

         The States agreed, through the MOU, to develop a Model Rule which would provide a framework for writing legislation to implement the RGGI Program.[9] The MOU stipulated that a comprehensive review of the Program would occur in 2012 and determined that various aspects of the Program could be changed.[10] Finally, the MOU stated: "This MOU may be amended in writing upon the collective agreement of the authorized representatives of the Signatory States."[11]

         In 2008, the Delaware Legislature enacted Delaware's RGGI Act. Both the Senate and the House of Representatives voted overwhelmingly in favor of the Act. The synopsis of the bill states as follows:

This bill grants legal authority for Delaware to participate in the Regional Greenhouse Gas Initiative (RGGI) CO2 cap and trade program. The bill grants DNREC the authority to implement the program including promulgating regulations and implementing or participating in an allowance auction as necessary to fulfill the goals of the program.[12] This bill further requires that all proceeds from the sale of RGGI CO2 allowances be used for public benefit purposes and directs revenues to the Delaware Sustainable Energy Utility (SEU) for the promotion of energy efficiency and renewable energy technologies, to programs designed to help low income ratepayers, to a Greenhouse Gas Reduction Program and to DNREC for administration of the program.[13]

         A review of Delaware's RGGI Act shows the following:

The Memorandum of Understanding ("MOU") signed by the Governors of participating RGGI states requires each participating state to promulgate regulations to establish a cap-and-trade program for CO2 with the goal of stabilizing CO2 emissions at current levels through 2015 and reducing by 10 percent such emissions by 2019.[14]

         Delaware's RGGI Act further explains that the MOU sets an initial emissions cap of 7, 559, 787 short tons of CO2 for Delaware. It is specifically provided that this cap "may be adjusted in the future."[15] Delaware's RGGI Act authorizes the Secretary "to promulgate regulations to implement the RGGI cap and trade program consistent with the RGGI Memorandum of Understanding, as amended."[16] This Act also directs the Secretary to participate with the other states in the RGGI Program and any national program which might be implemented.[17]

         Regulations No. 1147 were promulgated and implemented in November, 2008.[18] The following explanation was contained therein:

Beginning in 2009 through 2015, the emissions of CO2 from any EGU [Electric Generating Unit] with a maximum rated heat input capacity of equal to or greater than 25 megawatts that is located in a RGGI state would be capped at current levels (emissions from Delaware affected facilities account for approximately 7.5 million tons). After 2015, the cap would be reduced incrementally to achieve a 10 percent reduction by 2019. Under the cap-and-trade program, one allowance is equivalent to one ton of CO2 emissions allowed by the cap. Each subject EGU will be required to have enough allowances to cover its reported emissions during the three year compliance periods. The EGUs may buy or sell allowances, but individual EGU emissions shall not exceed the amount of allowances it possesses. The total amount of the allowances will be equal to the emissions cap for the RGGI states.[19]

         The only facilities in Delaware required to have a CO2 permit under Regulations No. 1147 are the City of Dover, NRG Dover, NRG McKee Run (a DEMEC facility), Vansant, Indian River (a NRG facility), Calpine Edgemoor, Calpine Hay Road, and Delaware City Refinery.[20]There are approximately thirty (30) units at these facilities impacted by Delaware's RGGI.[21] The entities holding the permits are Calpine, Edgemoor, Hay Road, NRG, DEMEC and the City of Dover.[22] These entities, which were required to obtain, and comply with, a permit and were directly subject to the regulations, had standing to appeal the regulations.[23] No entity required to have a permit appealed the enactment of Regulations No. 1147.

         In general, allowances may be purchased at auction, purchased on the secondary market, gifted by direct allocation, or created through offset projects.[24] Pursuant to statute, the regulated facilities initially were given allowances over a five (5) year period, i.e., they did not have to purchase them.[25] Once given, an allowance lasts forever until used.[26] The regulated facilities had a large number of allowances in their accounts.[27] No information exists as to when any of the generators had to start purchasing allowances. The fact that allowances did not have to be purchased was not considered by plaintiffs' witnesses.

         In 2012, as provided for in the RGGIMOU, a review took place of the RGGI Program and, in particular, the CO2 Budget Trading Program. There was an oversupply of allocations[28] because of an unanticipated increase in the use of natural gas, which is a lower carbon-intensive fuel.[29] It was determined that changes in the market and changes in the program required a modification of the RGGI Program. As defendants explained, the review showed:

[T]he initial emissions allocations were too generous with respect to actual emissions. To achieve emissions reductions, it was necessary to reduce all of the states' allocations. However, since it was always a concern that allowance prices could be driven too high, other changes were made to the Model Rule to prevent such occurrence.[30]
It was determined:
* The Regional Emissions Cap in 2014 will be equal to 91 million tons. The Regional Emissions Cap and each Participating State's individual emission;; budget will decline 2.5% each year 2015 through 2020.
*The Participating States will address the bank of allowances held by market participants with two interim adjustments for banked allowances. The first adjustment will be made over a 7-year period (2014-2020) for the first control period private bank of allowances and a second adjustment will be made over a 6-year period (2015-2020) for the 2012-2013 period private bank: of allowances.[31]

         This agreement was not implemented by any amendment to tr e MOU. Instead, changes were made by way of an Updated Model Rule.[32] The Participating States agreed to revise their regulations or statutes based on the Updated Model Rule and to do so by January 1, 2014.[33]

         In accordance with this agreement, Delaware amended 7 DE Admin. Code 1147, stating:

The amendments to the Model Rule will be incorporated into the Department's proposed amendments to 7 DE Admin. Code 1147, to ensure;hat Delaware's RGGI regulations are current with market conditions and continue to support reductions of CO2 in the electricity generation sector.[34]

         In Secretary's Order No.: 2013-A-0054, the Secretary explained that 7 Del. C. § 6043(a)(9) specifically states that the emissions '"cap and Delaware's allocation may be adjusted in the future'", and concluded: "[T]he Department believes that the statute grants the DNREC Secretary the authority to further reduce the emissions cap to comply with the emissions reduction goal."[35]

         These amended regulations went into effect on December 11, 2013.[36] The reduction of CO2 permits has tended to cause the prices of CO2 allowances at auction to rise.[37]

         No regulated entity which must purchase the allowances complained or filed an appeal from the amended regulations. As noted above, these regulated entities had standing to appeal because they were subject to the amended regulations.[38] This law renders meritless plaintiffs' arguments that these regulated entities lack standing to sue because they will not suffer financial harm and thus, the amended regulations never could be reviewed absent plaintiffs' suit.[39]

         Only plaintiffs appealed the amended regulations. Plaintiffs are not subject to the amended regulations. However, they allege they have/will suffer harm in fact in that the increased costs of the allowances will be passed on to them in their electric bills. As the litigation moved forward, plaintiffs' electric bills actually decreased over the pertinent time period. Consequently, plaintiffs' argument morphed to the argument that had the amended regulations not come into effect, they would have had to pay even less on their electric bills, and thus, they are financially harmed.[40]

         Dr. Tierney and her Testimony

         In order to render this decision, the Court relies upon the testimony of Susan F. Tierney, Ph.D. Dr. Tierney is defendants' expert. Plaintiffs seek to keep out ail or portions of her testimony in several ways. First, they moved, during trial, to exclude certain testimony and evidence because plaintiffs contend it was "new" and defendants "sandbagged them with it. Second, plaintiffs moved, before trial, to exclude her testimony.[41]

         Objection to "New Analysis"

         Plaintiffs pursue, in their post-trial briefing, their arguments initially made at trial that the Court cannot consider what they label "New Analysis" by Dr. Tierney. The only new information was the analysis of Stevenson's electric bill. There is a good deal of ringer-pointing over this issue which this Court refuses to address. Objection to this is much to do about nothing because Stevenson himself admitted it is difficult to prove a direct link between PJM wholesale market prices and consumer utility bills.[42] The Court will exclude the analysis or Stevenson's electric bill only because it is too insignificant of an issue on which to spend rime. The other information contained within the "New Analysis" reflects Dr. Tierney's previously-provided information. That information merely was turned into a demonstrative format. That is not "new"' and the Court continues to rule, as it did at trial, that this demonstrative evidence may remain in evidence.

         Motion in limine

         Dr. Tierney's resume' is forty (40) pages long.[43] She is an expert on energy economics, regulation and policy, particularly in the electric and gas industries. She currently is a Senior Advisor at Analysis Group Inc., where she provides policy, economic and strategy consulting in the energy industry. The company for which she works is an economic, financial, and business strategy consulting firm. She is the lead consultant on many of their projects. She has had a thirty (30) year career "as a regulator, policymaker, university professor, consultant, and expert witness."[44] She speaks frequently at industry conferences. She serves on Boards and Advisory Committees for numerous energy institutes and foundations. She has published an extremely large number of reports and articles in her field of expertise.

         As she explains, she has been directly involved in issues relevant to this matter as follows:

economic analysis of issues affecting electric utilities, wholesale power markets and consumers' utility rates; utility regulation; price formation in electric power systems, including impacts of changes in fuel prices, technology changes, environmental requirements and other facts; the structure of the electric industry and implications for the reliable and economically efficient provision of electricity; the design of environmental polices to control emissions of air pollutants from the power sector and the implications of different policy designs for costs to power producers and to consumers; and the macroeconomic costs associated with wholesale and retail rate and price analysis.[45]

         She has co-authored two reports which focused on the economic impacts of RGGI. The first, dated November 15, 2011, is titled, "The Economic Impacts of the Regional Greenhouse Gas Initiative on Ten Northeast and Mid-Atlantic States: Review of the Use of RGGI Auction Proceeds from the First Three-Year Compliance Period".[46] The second report, dated July 14, 2015, is titled, "The Economic Impacts of the Regional Greenhouse Gas Initiative on Nine Northeast and Mid-Atlantic States: Review of RGGI's Second Three-Year Compliance Period (2012-2014)."[47] These studies include a review of RGGI's economic effects in Delaware.

         In deciding a motion for summary judgment, this Court previously ruled Dr. Tierney to be an expert on the pertinent areas in question.[48] Nothing at the hearing in this matter or in the post-trial briefing has changed that opinion. She has been involved directly in issues relevant to the matter at hand. She is uniquely qualified as an expert to speak to the issues relevant to this case, those issues being "the impacts of the State of Delaware's participation in the Regional Greenhouse Gas Initiative ("RGGI") and the impacts of such participation on the rates of electricity customers in Delaware and on the Delaware economy."[49]

         Plaintiffs recognize Dr. Tierney is an expert. However, they seek to exclude her testimony on a number of grounds.

         I first address plaintiffs' argument based upon an incorrect premise. Plaintiffs argue Dr. Tierney has not taken into account their contention that Delaware has not spent any of the additional CO2 allowance auction revenues generated from the ameneel Delaware RGGI regulations.[50] Thus, they argue, her opinion that any increases in wholesale prices are offset by decreased use in electricity resulting from the allowance monies spent on energy-saving programs is invalid. This argument is based upon the incorrect premise that Delaware has not spent any of the additional CO2 allowance auction revenues generated from the amended RGGI regulations on energy-saving programs.

         Upon the enactment of Delaware's RGGI, Delaware took 10% of the proceeds from the auction and applied them to the administration of the program while it applied 90% of the proceeds to consumer benefit programs.[51] Of that 90% being applied to programs which benefit consumers, 65% went to the Delaware Sustainable Energy Utility (SEU) for the promotion of energy efficiency and renewable energy technologies; 10% to the Weatherization Program; 5% to the Low Income Home Energy Assistance Program; and 10% to mitigation.[52] Since the enactment of the amended regulations, Delaware has spent monies for weatherization, mitigation and low income assistance. From 2012-2014, the State spent monies on low income assistance, on funding energy efficiency measures in the buildings of electricity consumers, on other greenhouse-gas emission reduction programs and investment in renewable energy.[53] This fact undermines plaintiffs argument that no monies have been applied to benefit consumers since the implementation of the amended regulations.

         Plaintiffs' other argument is that because Dr. Tierney has stated she does not have an opinion on the impact of the amended regulations on the individual plaintiffs' electric bills, her opinion and all of the evidence presented by her should be excluded.[54] They then turn around and seek to include portions of her testimony, arguing that Dr. Tierney's submissions "establish that the New RGGI Regulations will directly and proximately cause an increase in the electric bills of consumers like the Plaintiffs who do not receive any subsidies or financial funding from the RGGI Program."[55]

         Dr. Tierney's basic conclusions, based upon knowledge, data, studies, and experience, are as follows. Electric-generating units will incur increased costs associated with the amended regulations; however, other RGGI effects offset those increased costs and consumers' electric bills actually decrease rather than increase.[56] This results because the money from the auctions have been spent on energy-efficiency programs or products, which, in the end, have resulted in a decrease in demand and that has caused a lowering of electricity prices. To repeat, her studies show, and her testimony is, that in the end, Delaware consumers will not pay greater prices because of RGGI; instead, their electric bills are less than what they would be because of RGGI as originally imposed and as governed by the amended regulations.

         Dr. Tierney did agree that she was not testifying on the impact of the amended regulations on each individual plaintiffs electric bills. Defendants had no obligation to study the individual plaintiffs' electric bills and provide an opinion on the effect of the an ended regulations on them. That was plaintiffs' burden.

         Plaintiffs' motion in limine is denied. Dr. Tierney's specialized knowledge and training is based on sufficient facts and data and she has applied the appropriate principles and methods reliably to the facts. Dr. Tierney's testimony has educated the Court en electricity generation, the wholesale and retail pricing of electricity, the connection (which is not direct) between the costs generators incur and the retail prices consumers pay, and the effects of Delaware's RGGI on consumers' electric bills. Her testimony rebuts plaintiffs' witnesses' testimony by highlighting the flaws in Dr. Stapleford and Stevenson's knowledge, understanding and testimony on the issues at hand and by establishing plaintiffs' simplistic economic theory is inapplicable and invalid.

         Pertinent Basics of Electricity and Pricing[57]

         Plaintiffs ground their case on the basic economic theory that increased costs to the electricity generator directly result in increased prices to the consumer. Dr. Tierney's testimony and evidence establish that this theory does not apply in the context of electricity pricing.[58] She could not know the cause-and-effect connection between CO2 permit costs and impacts on individual customers' bills because of "so many disconnections between the wholesale price formation and electricity rate-making for individual customers."[59] "[T]here is not a one-to-one relationship between those circumstances in the wholesale market and the actual rates charged to consumers in their retail electricity bills."[60] The one-to-one relationship does not exist because of:

(a) the character of the way that electric power plants are dispatched; (b) the manner in which price formation occurs in the wholesale electric industry in PJM; and (c) and how the costs and carbon intensity of different power plants affects the ability of the generator to pass through CO2 allowance costs to consumers.[61]

         In order to better understand her conclusions and the workings of electricity production and pricing, I set forth some of the basic concepts.[62]

         There are various types of generators of electricity, including, but not limited to, fossil fuel (oil, coal, or natural gas (which is less carbon intensive)); nuclear; solar; wind; geothermal; hydroelectric. Delaware is part of the PJM region, which consists of an integrated grid of power plants. The PJM[63] grid currently encompasses thirteen (13) states, including Delaware. PJM includes states that are non-RGGI participants and others that are RGGI participants. While PJM consists of thousands of generating units, only approximately thirty (30) of those units are affected by Delaware's RGGI.[64]

         PJM (also referred to as the "grid operator") dispatches plants to supply power according to their offer price. The offer prices are based on the plants' cost to produce electricity. The grid operator decides how many of those offering plants to dispatch at any point in time in order to meet instantaneous demand. "[I]t is the offer price of the generator whose output (when combined with output from generators with lower offer prices) serves to salisfy demand sets the clearing price."[65] The price of the last generator called upon to operate in a particular moment is the clearing price. Every generator selected to provide power at that moment is paid that clearing price. The group of plants dispatching power can include carbon-intensive and less carbon intensive generators and/or non-carbon energy generators. The clearing price varies across the course of the year and across the time of day as demand for electricity goes up and down.

         When demands are greater, more power plants are dispatched to meet the demand. Including CO2 prices in the offer prices can change the dispatch order of plants and make the less carbon intensive and/or non-carbon generators more competitive.[66]

         Reductions in peak demand reduce the costs of electricity because the dispatch of power from relatively costly plants is avoided.[67] Energy efficiency programs can cause those reductions in peak demand.[68] Even plaintiff Moore agreed that significant or drastic reductions in demand and costs can be achieved fairly economically.[69]

         To repeat, the generators which are a part of the clearing price at a particular moment can include carbon-intensive generators, less-carbon intensive generators and/or non-carbon generators. The clearing prices, which include the price of CO2 allowances, are based upon:

many variables that would have both an upward and downward effect on prices.
For example, demands for electricity were flatter than you might have seen in the recent past. That would tend to reduce the demand for carbon allowances because you don't have to generate as much electricity.
So economic conditions, if natural gas prices are cheaper than coal, then that would reduce the demand for allowances. So a lot of different things would go into expectations about forward prices.[70]

         Dr. Tierney further explained:

But there is not a one-to-one relationship between the cost incurred by power plant owners to keep their plants open and then to generate power from that on the one hand, and the prices that are paid to power plant owners, or the electricity and capacity that they produce to the system.
So, in fact, there are some power plant owners who do not enjoy the opportunity to pass along all of their costs because of the way the prices are formed in the markets that happen to coincide with the RGGI states. Each of the RGGI states operates in a power plant centralized wholesale market that does no 1 allow for a one-to-one pass-through of costs of power plant owners into wholesale prices paid by consumers.[71]

         Because the hourly electricity prices established in the PJM are federally regulated, many of the costs imposed by the individual states (such as RGGI allowances) cannot be passed on in the wholesale market.[72]

         The problems with tracking RGGI costs (if any) from the generator:o the retail consumer are compounded by the subsequent steps involved in obtaining electricity.

         Plaintiffs are retail customers either of Delmarva Power or Delaware Electric Cooperative ("DEC" or "Delaware Electric Co-Op"). Dr. Tierney explained how the two companies acquire their electricity and set prices for their customers.

         She first addressed Delmarva Power:

... [A] utility like Delmarva Power is a utility that is a wires-only electric company. Those customers of Delmarva Power who are purchasing what is called bundled electricity service and they are purchasing their total electricity supply and wires - essentially paying for the cost of transmission and distribution facilities, I'm calling that wires. What I described in the wholesale market is supply.
So Delmarva Power doesn't own any power plants. It has to purchase from the wholesale markets, from contractors[73] to supply service for Delmarva Power consumers. And the way that that works is those power suppliers offer to Delmarva Power to provide electricity, for example, to a residential electricity customer at a certain price that is fixed in advance, and then that is held in place for a three-year period of time.
So let's say we're standing in 2014. The way that it works for Delmarva Power is that one-third of the supply that's available to meet a customer's demand in 2014 is provided by somebody who offered and won the contract thee years before that. They have a three-year contract for a third of the supply
Then two years in advance of 2014 there is another supplier who has won a contract. He or she is providing a third. And then in 2013 someone won that offer and they are ... supplying one-third of supply to Delmarva Power.
The electricity customer, therefore, in 2014, is paying contract prices established before 2014, and long before 2014 in some cases, but also long before the end of 2013 when those contracts were established.
Okay. So over time those contracts, those supply contracts for Delmarva Power customers, are not only provided well in advance, but they reflect the expectation of those suppliers about a myriad of things; most importantly, the cost of natural gas and the ...

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