Rittenhouse: Are you seeing actions at the state level that would help people gain more certainty in estimating the cost of CO₂ reductions so they could plan for the future?

Furey: A group of eight governors in the Northeast wants to reduce carbon emissions by 2010. We expect that sometime this year, they’ll propose regulations that all eight states can adopt in common. Currently, Massachusetts has laws regulating CO₂ emissions on power plants as does New Hampshire. California has carbon reduction rules for vehicles. The focus has primarily been on regulating greenhouse gas emissions (GHG) from power companies since they are the largest emitters. But many people in the industry want to see comprehensive regulation that applies to all sectors.

Rittenhouse: How will this affect electric power prices?

Furey: Initially, carbon regulation efforts will affect prices in the Northeast. As I mentioned before, there probably will be carbon reduction rules in place in eight northeastern states. Additionally, we may see higher power prices for the power imported from Canada. Having signed the Kyoto Protocol, they have to comply with the new regulations. The Province of Ontario has announced plans to shut down 7,700 megawatts of coal-fired capacity. Currently, regulation of power industry pollutants is fragmented. This creates uncertainty for companies and challenges their ability to effectively plan capital expenditures. I believe that Cinergy mentions the need for comprehensive federal law that addresses all pollutants.

Rittenhouse: I’ve heard that companies who are proactive in complying with regulations may benefit by acting early.

Furey: Yes, that was true with regards to being proactive with the phasing in of SO₂ compliance. For example, the U.S. EPA allocates each company a certain number of “allowances” under the Clean Air Act. For each allowance, a company gets to emit (in the case of SO₂) a ton of the pollutant. If companies accelerate their emission reductions, they will have allowances that they can sell to others. They can also decide to bank these so they can use them in the future.

Many in the industry believe CO₂ regulation will establish a system that also phases in increasing reductions over time. Some companies are concerned that if they reduce emissions before a definitive federal law is in place their reduction schedule will be based on the lower emissions levels at the time the law is enacted. They won’t get credit for the efforts and expense they had made to reduce CO₂. Other companies believe that they will be rewarded for early compliance. I happen to think that from a management perspective, being proactive is a positive attribute across the board. Companies will be better prepared if they are looking out for a problem before it happens. When you are acting, your competitors will be reacting. This will put you ahead.

Rittenhouse: How well are these markets working?

Furey: Markets for SO₂ and NO_X both work. The EPA verifies the amount of pollution at its source. Because companies are required — at least for SO₂ and NO_X — to put in verification equipment, I don’t really know how anyone could game that system unless they can tamper with the equipment. At this point in time, the markets have not been robust or liquid enough to have a lot of people entering the market just to trade. For SO₂ and NO_X, sulfur is the more liquid market and there are days when things just aren’t traded. In the report we did, I mentioned Cantor Fitzgerald and some other entities that are trading SO₂ and NO_X allowances. The Chicago Climate Exchange will act as a clearinghouse and has started selling SO₂ futures. They’re going to have a committee that will actually determine a price for days when there are no trades on the exchange.