Opening Day: CAT Bonds, Climate Change and the 2012 Hurricane Season

May 31, 2012 20:54
by J. Wylie Donald
Tomorrow is June 1,  the official start of the Atlantic Hurricane Season, which is predicted by NOAA to be near normal. It comes almost as an afterthought this year because already we have had two named storms.  In mid-May Tropical Storm Alberto appeared and quickly disappeared.  It was followed shortly after by Tropical Storm Beryl, which made landfall at Jacksonville, Florida with record winds for a May storm.   Some undoubtedly have the view that the season's early arrival is further evidence of climate change.  That conclusion may be premature.  According to a report by the Miami Herald,  single named storms in the pre-season are not that unusual, but to have two, that has happened only thrice in the 150 years of official recordkeeping.  The science too does not support increased frequency of tropical storms as a result of climate change.  In a 2010 article, Tropical cyclones and climate change, Dr. Thomas Knutson with many others set forth what they perceived as the state of the science: Frequency. It is likely that the global frequency of tropical cyclones will either decrease or remain essentially unchanged owing to greenhouse warming. .... Current models project changes ranging from −6 to −34% globally, and up to ±50% or more in individual basins by the late twenty-first century.Intensity. Some increase in the mean maximum wind speed of tropical cyclones is likely (+2 to +11% globally) with projected twenty-first-century warming, although increases may not occur in all tropical regions. The frequency of the most intense (rare/high-impact) storms will more likely than not increase by a substantially larger percentage in some basins.Rainfall. Rainfall rates are likely to increase. The projected magnitude is on the order of +20% within 100 km of the tropical cyclone centre. This may not be nearly as dire as some have suggested, but we point out that ignoring a substantial increase in the frequency of storms like Hurricanes Katrina and Andrew is done at some peril.  People in harm's way are paying attention and using this kind of analysis to make decisions on how to insure the billions of dollars of at-risk property in Florida.  We have written before of the "life on the edge" of Florida's insurer of last resort, Citizens' Property Insurance Corporation.  In trying to get off the edge and get closer to financial stability, Citizens this spring made the insurance record books when it became the ceding insurer on the largest reinsurance catastrophe bond1 ever placed:  $750 million.  So where does climate change fit in?  The CAT bond's offering document doesn't mention climate change at all.  But one should not be fooled.  The modeler for the bond is AIR Worldwide.  AIR is all over climate change risks.  In fact, just this March AIR published a literature review regarding extratropical cyclones (aka North Atlantic winter storms).   • The frequency of ETCs may diminish with increasing global temperatures• The intensity of the more extreme ETCs may rise• ETC tracks are expected to shift poleward in both hemispheres One can see parallels with the conclusions reached by Dr. Knutson et al. regarding tropical cyclones.  Accordingly, we think it would be naive to conclude that AIR did not model for climate change.  We also expect that the negotiators for Citizens wanted to insure that climate change risk was applied. As did the investors. So climate change matters to the people with real skin in the game - like three-quarters of a billion dollars.  As such, one can bet all involved are paying close attention to the official opening of the Atlantic Hurricane Season, and also to what occurs before and what occurs after. 1This is not the financial instruments blog but for those who want a quick explanation try this from BusinessWeek:  "An insurance company issues bonds to financial investors, such as hedge and pension funds, that are willing to place a bet on the probability of a disaster occurring at a particular location and during a specific time frame. During the life of the bond, the insurer pays investors a coupon interest rate. If nothing happens, the insurer returns the money when the bond matures. If the fates are cruel, cat bond investors kiss off all or part of the principal."  What investors especially like is that there is no correlation between cat bond risk and stock market or corporate bond risk.

Climate Change | Insurance | Regulation | Weather

Clash of the (Electric Vehicle Charging Station) Titans: ECOtality v. NRG

May 27, 2012 21:29
by J. Wylie Donald
What do you get when the beneficiary of “the largest public/private federal transportation electrification grant provided by the U.S. Department of Energy” concludes that “one of the country’s largest power generation and retail electricity businesses” is not playing fair?  What you get is quite an interesting lawsuit filed in the California Court of Appeal.  See ECOtality, Inc. v. California Public Utilities Comm’n, et al., Verified Petition for Writ of Mandate (attached).  ECOtality, the project manager of The EV Project, filed suit last Friday seeking to upset a settlement NRG Energy, Inc. has entered into with the California Public Utilities Commission arising from the “California Energy Crisis” of 2000-01.  You didn’t think ECOtality even existed back then.  You would be wrong (it was formed in 1989), but you would be right in concluding that its present lawsuit has nothing to do with what NRG (actually its predecessor) did or didn’t do back in 2000.  The present lawsuit is all about who will dominate the electric vehicle infrastructure marketplace in California in 2012 and beyond. NRG is settling the PUC’s claim to resolve price-gouging allegations of nearly $1 billion.  Payment of $122,500,000, combined with an earlier payment of almost $300 million “captures significant value for California under circumstances where contentious and expensive litigation would otherwise have continued for many years and with uncertain results,” according to California PUC Commissioner Mike Florio.  ECOtality sees things differently.  “If the [settlement] Agreement stands, it will permit NRG, subsidized by the value of the California ratepayers’ released claims, to establish itself and its subsidiary company, eVgo … into a controlling market position for electric vehicle (“EV”) charging facilities in California. The consequence is that NRG will not only be permitted to pursue monopolistic pricing to the injury of California consumers, but also effectively destroy its competitors – including Petitioner ECOtality – in this nascent marketplace, utilizing a rate-payer subsidy.”  Petition at 4.  ECOtality charges the PUC failed to follow proper process, ignored legislative directives, acted ultra vires its authority and unlawfully failed to restore overcharges to the ratepayers.  Petition at 27-31. What are you to make of this?  On the one hand is NRG.  According to ECOtality, NRG is a colossus delivering over 2 gigawatts of power to over 2 million customers in 16 states.  Its subsidiary, eVgo, “created the nation’s first comprehensive, privately funded electric vehicle infrastructure of home charging stations and public fast charging stations, ensuring that EV drivers have complete confidence they will never run out of power on the go.” Petition ¶ 11.  NRG’s and eVgo’s websites confirm all this.  More specifically, for $89 per month on a three-year agreement, eVgo will install a home charging station and give you non-peak electricity to charge your car at home, and anytime at eVgo network stations.  But you can only do this in Dallas-Forth Worth and Houston at about 5 dozen built and planned stations.  eVgo isn’t operational anywhere else. On the other hand is every other business interested in electric vehicle infrastructure.  ECOtality’s Petition identifies a number of them, like Better Place, Car Charging Group, Inc., Coulomb Technologies, Aloha Systems, Incorporated, Tesla Motors, TechNet, City CarShare, and Evercharge, each of  “whose business includes participation, either presently, or in the future, in the California marketplace for electric vehicle charging services.“  Petition at 2.  And it includes ECOtality, whose residential charging operations in California include 1245 in the Bay Area, 729 in the San Diego area, and 418 in the Los Angeles area, and whose commercial facilities include 159 stations in the San Diego area (447 planned) and 177 in the Los Angeles area (214 planned).  Petition ¶ 6. ECOtality is also the data gatherer for the Department of Energy’s EV Project, which is collecting information on the use of electric cars in a half dozen states (California, Oregon, Washington, Arizona, Texas, and Tennessee, as well as the District of Columbia).  The EV Project numbers don’t reflect total regional or national sales or production.  But they do give some information on the penetration of electric cars in the market.   As of the end of March California users had logged over 12 million miles.  See Q1 2012 EV Project Report at 6 (attached).  Texas users trailed every other state, at 575,000 miles barely doubling the miles put on by District of Columbia drivers. So what bothers ECOtality about the NRG-PUC settlement?  Under the agreement, NRG is set to become a major player in California.  One aspect of the agreement is the payment of $20 million “cash consideration” to the PUC.  Another aspect is the construction and operation of 200 fast charging stations that will be available for use by the general public, at a cost of $50,500,000.  Then there is the development, funding and implementation of pilot programs for EV-related technology and EV car sharing. But all of that is nothing when compared with the massive involvement NRG is mandated to make in the California market as set out in the Joint Offer of Settlement:  “the installation of infrastructure to support ten-thousand privately-owned chargers at a total of one-thousand multi-family, workplace and public interest sites (e.g., public university).”  In the language of the settlement, NRG is providing 1000 Make-Ready Arrays, which will provide 10,000 Make-Ready Stubs, to which property owners can attach charging stations.  This is to cost $40 million over four years with minimum numbers of facilities specified in various areas.  NRG has discretion to complete the build-out both geographically and by site-type (e.g., multi-family, retail) in the manner most advantageous to it.  If NRG builds along the lines of the minimum distribution mandated by the settlement, that translates to 5500 chargers in Los Angeles, 2750 in San Francisco and 1000 in San Diego. NRG has exclusive rights to provide service to the Make-Ready Stub for 18 months after the stub is ready for operation. In other words, ECOtality’s market dominance in California will be challenged.  Specifically, “By giving NRG an 18 month head start, subsidized by ratepayers, the Agreement permits NRG to “cherry pick” 1,200 of the most favorable California real estate locations for [electric vehicle charging stations] in a manner that will not only saturate the market, but permanently disadvantage its competitors, including Petitioner, by relegating them to much less valuable secondary locations.”  Petition ¶ 40. Our take on all this is that this is all about timing.  Get there fustest with the mostest is poor English, out-of-context and ahistorical, but nevertheless apt. Stated differently, keep the other fellow from getting there with anything. When the cavalry is unavailable, try a lawsuit.  As the market for electric cars cranks up (ECOtality’s website reports 28 million miles driven so far in the EV Project), the difference between success and failure may come down to location, brand recognition, and market access.  The battle is joined on all three in California.  We will not be surprised by variations on this theme elsewhere.   20120525 ECOtality v California Public Utilities Commission et al, Verified Petition for Writ of Mandate.pdf (286.06 kb) Q1 2012 EV Project Report, ECOtality.pdf (8.31 mb)

Regulation | Sustainability | Utilities

A Primer on How Regulation of Greenhouse Gases Coming out of a Tailpipe Led to Regulation of Greenhouse Gases Coming out of a Stack

March 29, 2012 21:38
by J. Wylie Donald
Tuesday EPA issued its proposed rule (see related post) concerning new source performance standards for greenhouse gas emissions for electric power plants.  This all started when EPA refused to address greenhouse gas emissions coming out of cars.  Cars to power plants.  Some may be wondering how the camel got into this tent. The story begins of course with Massachusetts v. EPA, 549 U.S. 497 (2007), where the Supreme Court held that greenhouse gases emitted in automobile exhaust were "air pollutants" within the meaning of the Clean Air Act.  This meant that EPA had to assess whether they caused or contributed to "air pollution which may reasonably be anticipated to endanger public health."  42 U.S.C. § 7521(a)(1). That assessment was completed in December 2009 and EPA concluded in the "Endangerment Finding" that "that six greenhouse gases taken in combination endanger both the public health and the public welfare of current and future generations." 74 Fed. Reg. 66,496 (Dec. 15, 2009).  The Endangerment Finding did not impose any requirements, but it set the stage for regulation.  In September 2009 EPA and the US Department of Transportation issued proposed rules to establish greenhouse gas emission standards for certain motor vehicles.  The final rule was published on May 7, 2010 and went into effect on January 2, 2011.  75 Fed. Reg. 25324 (May 7, 2010).  The camel's nose was in the tent. And with that, EPA now had the prerequisite to set greenhouse gas emissions limits elsewhere.  At least that is EPA's position.  In a nutshell, stationary sources that emit 250 tons per year of "pollutants" are subject to the Prevention of Significant Deterioration (PSD) program.  One element of the PSD program is that Best Available Control Technology (BACT) analysis is required for "each pollutant subject to regulation" under the Clean Air Act.  42 U.S.C. 7475(a)(4).  When the motor vehicle greenhouse gas regulation kicked in on January 2, 2011, greenhouse gases were subject to regulation, and therefore electric utilities emitting greenhouse gases were required to conduct a BACT analysis.  All of the camel was in the tent. All of these regulations (and others) were challenged.  Oral argument in those cases was heard before the D.C. Circuit at the end of February.  The regulated community awaits; who knows what the camel is thinking.   

Carbon Dioxide | Carbon Emissions | Regulation

Proposed Rule for Power Plant Greenhouse Gas Emissions: Much Ado About Nothing?

March 29, 2012 21:20
by J. Wylie Donald
Wow!  Whether one likes the president or not, one must concede he's not afraid of leading. Just a little over seven months from the election he has drawn a line in the sand and proposed a rule that may fundamentally alter America's energy mix and takes a big step toward addressing carbon dioxide emissions.  Or it does nothing at all.  We are talking of course of Tuesday's announcement of new source performance standards for electricity plants.   In EPA's words: The EPA is proposing standards of performance that require that all new fossil fuel-fired EGUs meet an electricity-output-based emission rate of 1,000 lbCO2/MWh of electricity generated on a gross basis. This proposed standard is based on the demonstrated performance of natural gas combined cycle (NGCC) units, which are currently in wide use throughout the country, and are likely to be the predominant fossil fuel-fired technology for new generation in the future.  EPA, Standards of Performance for Greenhouse Gas Emissions for New Stationary Sources: Electric Utility Generating Units (proposed rule) at 13 (Mar. 27, 2012) . So natural gas is in.  And what about the other fossil fuels?  New plants using coal or oil and even IGCC (integrated gas combined cycle) can be built but EPA expects that they will need to use carbon capture and storage (CCS) to meet the standards.  Id. What brought about this groundbreaking new rule?  We set forth the legal foundation in a companion post.  Suffice to say here that EPA has moved a long way from the days before Massachusetts v. EPA, 549 U.S. 497 (2007), when greenhouse gases were not Clean Air Act "pollutants."  But the non-regulatory drivers were perhaps even more significant.  All are aware of "fracking".  The use of horizontal drilling with hydraulic fracturing in shales a mile beneath the surface has unleashed a torrent of natural gas.  As Forbes reports this month natural gas prices are half of what they were just a few years ago.  And the glut is not seen to be abating.  EPA has seized on this surfeit:  "technological developments and discoveries of abundant natural gas reserves have caused natural gas prices to decline precipitously in recent years and have secured those relatively low prices for the near-future."  Proposed Rule at 15.  As a result, "energy industry modeling forecasts uniformly predict that few, if any, new coal-fired power plants will be built in the foreseeable future."  Id.  In other words, the proposed regulation will have hardly any effect (even none) on coal-fired generation because no one was going to build those plants anyway.  "Our IPM modeling, using Energy Information Administration (EIA) reference case assumptions, projects that there will be no construction of new coal-fired generation without CCS by 2030. Under these assumptions, the proposed rule will not impose costs by 2030."  Id. at 17. We have read the commentary that this is the death of coal.  The cost of capturing and storing carbon dioxide, which will be the only way for a new coal plant to meet the new standard, is prohibitive. Accordingly, no coal plants will be built. According to EPA, however, coal-fired production was dead anyway because of the glut of natural gas.  Crystal balls are notoriously unreliable.  Some may remember that nuclear power was to make electricity too cheap to meter. But that didn't happen.  America built the largest man-made construction the world has ever seen (the interstate highway system) on the assumption that gasoline would always be abundant.  That was in error.  An oil embargo introduced Americans to long lines at the fuel pump and locking gas caps. Most forget that natural gas production peaked in the early 1970s, not to be exceeded again until over twenty years had passed.  The point is:  smart people took their best science and made plans.  But reality somehow did not get the message.  For what it is worth, here is our crystal ball on the demise of coal.  First, CCS technology is pertinent not only to coal. Combustion of natural gas emits carbon dioxide as well. The regulatory imperative will push natural gas plants to address their CO2, and coal will be able to take advantage of improvements in CCS technology. Second, the United States has been called the Saudi Arabia of coal. To expect that industry to dry up and blow away is naïve. Shale gas went from a vanishingly small fraction of the US energy mix to over 20% in five years or less. Innovation made this possible.  Just as ten years ago we could not imagine today's natural gas industry, we may not be able to recognize our coal resource in another ten years. Third, we thought it was fundamental that energy security depends on a mix of energy sources. It would be foolhardy to rely completely on natural gas.  It will only take one cold winter and a natural gas pipeline calamity to make coal seem like a sensible alternative.  Whether the proposed rule will actually have an impact depends on numerous factors.  All can agree, however, that climate change has been thrust back on the national agenda. 

Carbon Dioxide | Carbon Emissions | Greenhouse Gases | Regulation

Studies Map Climate Change Driven Storm Surge Down to Your Zip Code

March 16, 2012 20:09
by J. Wylie Donald
We were on the front page of the New York Times earlier this week. We wish!  Our marketing department has not cracked that nut yet. Not so the folks at Climate Central. Their press release about their report, Surging Seas, got them a front page spot in New York. It also was picked up by papers of record in Miami, Boston, Los Angeles, and Chicago, among others. Internet outlets like the Huffington Post and carried it. Even the UK's Daily Mail has picked it up. What was so momentous?  The researchers in our view did three things. The first is typical. They identified the risk caused by an effect of climate change. It is a serious risk, potentially affecting millions.  The second was astute.  The two published studies on storm surge and rising sea levels (Modelling sea level rise impacts on storm surges along US coasts, and Tidally adjusted estimates of topographic vulnerability to sea level rise and flooding for the contiguous United States) are dense.  Surging Seas converts them to understandable lay terms.  The third was their genius. They brought the issue down to zip code specifics. Let us explain.  The first step was accurately to determine the elevation of all the coastal property in the United States.  This was done using the National Elevation Dataset established by the US Geological Survey. The next step was to compare the elevations to local high tide levels as ascertained using NOAA information and techniques.  Overlaid on that was 2010 census data. Thus the Climate Central researchers had the best data on population and proximity to the sea. What's more, they could show that information visually and with granularity. What remained was to add storm surge data. This is the 900 pound gorilla. Rising sea levels will add only inches to the level of mean high tide in the next 20 years. The effect of storm surge is not so minor. To quote Surging Seas:  In many places, only inches separate the once-a-decade flood from the once-a-century one; and separate the water level communities have prepared for, from the one no one has seen. Critically, a small change can make a big difference, like the last inch of water that overflows a tub. This effect is dramatic. According to the authors of the report, for 2/3 of the locations analyzed the risk of a once-in-a-century flood has doubled, for 1/2 the risk has tripled. What this means is that for many storm surge flooding is no longer something one could expect to see once in a lifetime, or not at all. To get specific, the study "found that at over half the sites examined, there is a one-in-two or better chance of water reaching 4 feet higher than the average local high tide by 2030, at least once." Such flooding puts almost 5 million people at risk. To complete this part of the analysis the researchers looked at local water level gauges, land subsidence rates and global sea level rise to calculate local sea level rise. They then analyzed historical local extreme water level patterns (i.e., storm surges) assumed they would continue to exist, and applied them.  The conclusion is ominous:  "Sea level rise is raising the launch pad for storms and high tides, and being experienced by the ever-more frequent occurrence of extreme high water levels during these events -- long before the ocean reaches damaging heights permanently." Which brings us to the meat of the matter. Our in-laws are in South Florida. We can type in their zip code, and query the Climate Central web page as to the likelihood a 4-foot storm surge will invade their home before 2030. And we can blow up the map and look right at their street. We are buying them a canoe.  

Climate Change Effects | Legislation | Regulation | Rising Sea Levels | Weather

Global Warming Is Cooking Ice Hockey's Goose. But Not If The Western Climate Initiative Has Its Way.*

March 6, 2012 20:39
by J. Wylie Donald
There was dismal news out of the North yesterday.  Researchers in Canada have concluded that climate change threatens the national pastime.  In a March 5 article in Environmental Research Letters, researchers Nikolay Damyanov, Damon Matthews and Lawrence Mysak investigated changes in the outdoor skating season over the period 1951 to 2005.  They found "that the outdoor skating season (OSS) in Canada has significantly shortened in many regions of the country as a result of changing climate conditions."  The implications of that are dire:  "This suggests that future global warming has the potential to significantly compromise the viability of outdoor skating in Canada."  Fending off this looming cultural disaster is the Western Climate Initiative (WCI), which just this past Friday held a teleconference to discuss with stakeholders the recently released (February 21) WCI final recommendations for the Offset System Process.  Offsets are an alternative way to meet emissions reduction limits imposed by, for example, a greenhouse gas cap-and-trade program.  A party wishing to emit a quantity of greenhouse gas in excess of its allowance, may create or purchase an "offset" where certain activities have been completed which prevent the emission of other greenhouse gases, or sequester them, or otherwise reduce the amount of greenhouse gases in the atmosphere.  To quote from the WCI's Offset Systems Essential Elements document:  "An offset certificate represents a reduction or removal of one metric ton of carbon dioxide equivalent (tCO2e)."  Certain attributes of the offset are mandatory:  it must be "real, additional, permanent, and verifiable."  The only one of these attributes that bears additional comment is the concept of additionality, that is, "the portion of greenhouse gas emission reductions or removals that would not have happened under a baseline scenario."  Additionality can be difficult to demonstrate. Establishing the process to achieve these real, additional, permanent and verifiable reductions in atmospheric greenhouse gases are the February 21 Offset System Process recommendations.  They set forth the requirements for 1. Pre-Verification Activities a. registration - ”Project registration requires the submission of information for each project to the responsible WCI Partner jurisdiction."  b.  validation - "Validation is intended to provide the project developer and the WCI Partner jurisdiction with assurance that the project, when implemented, is likely to meet all of the WCI criteria [including reductions that are real, additional, permanent and verifiable]and is likely to result in emission reductions qualifying under the WCI offset system."  c. monitoring - "Monitoring of an offset project is intended to allow for the complete and transparent quantification of GHG reductions or removals." d. quantification - "Quantification is the process of estimating emissions reductions achieved from project activity data collected through monitoring."  e. reporting - "Reporting refers to the process of summarizing project monitoring data, quantifying the GHG reduction achieved in the applicable period according to the calculation methodology in the project plan, and documenting that information in a project report. ... The WCI Partner jurisdictions will establish overall reporting requirements to ensure adequate oversight of the offset system." These pre-verification activities can be completed in any order but must be completed before moving to verification, certification and offset issuance. 2.  Verification- "Verification is the process of reviewing offset project information to ensure that claimed emissions reductions have been achieved in accordance with the appropriate protocol and project plan." 3.  Certification - In the certification step the jurisdiction “accepts” "that the documentation provided and reviewed indicates that the reduction upon which the offset certificate may be based is real, additional, permanent and verifiable." 4.  Issuance of offsets - When all of the above steps are completed, "the WCI Partner jurisdiction will issue offset certificates in a number equal to the reductions credited to the projects, with each issued offset certificate representing one metric tonne CO2e reduced or removed." This protocol is required so that there is "transparency" between the member WCI jurisdictions and an offset project valid in one state or province is accepted and valid in another.  In the event that a project fails to permanently provide the reduction promised (either because of failure of the project, through fraud, or for some other reason) the recommendation provides for the reversal of the offset thus "maintaining the environmental integrity of the program by ensuring every certificate in the system is supported by an emission reduction that is real, additional, permanent and verifiable." Readers are familiar with the facts that Canada has withdrawn from the Kyoto Protocol and is vigorously promoting development of its tar sands to the detriment of reduction of its greenhouse gas emissions.  Readers also are aware that the WCI is, to be charitable not robust as only California and four Canadian provinces remain active.  See Soldiering On: The Western Climate Initiative and RGGI in 2012 and Beyond.  Will the slow demise of ice hockey change any of that?  Some think so.  In an excellent piece by Suzanne Goldenberg in the Guardian, Professor Matthews is quoted:   ""I think this is going to strike a chord with Canadians," Matthews said. "When I think of things that are vulnerable to climate change that people care about in Canada I would place outdoor ice hockey very close to the top of that list." *We apologize for the title of this post. Competition for tired metaphors was heavy. The Montreal Gazette captured the title with a double:  Thin ice:  Outdoor rinks face meltdown.  

Climate Change Effects | Regulation

Blow the Man Down. US Offshore Wind Farm Leasing Takes a Big Step Forward

February 3, 2012 07:47
by J. Wylie Donald
Yesterday was a banner day for offshore wind farms in the mid-Atlantic.  Promoters and advocates received a favorable environmental assessment, a new form and two calls for nominations.  The Environmental Assessment.  Secretary Ken Salazar of the Department of the Interior gave wind developers a big boost when he announced the Department's decision to move forward with government leases of offshore areas for wind farms. This comes at a crucial time for wind turbine manufacturers; Danish turbine giant Vestas A/S announced last month that it would be closing one factory, laying off ten percent of its work force in light of the recession and increased competition from China, and considering additional layoffs in the United States.  The Department's finding of "no significant impact" from activities related to site assessment such as geotechnical surveys or the installation of meteorological towers opens the door to the gathering of data without completion of a further environmental impact statement.  Completion of the environmental assessment is not a green light for all projects, but it is estimated that it will take two years off the planning and construction schedule.  Specific projects still will need to complete an environmental impact statement.  One issue, for example, may be birds. The red knot, an intercontinental migrating species of sandpiper, flies almost twenty thousand miles each year from Brazil to Canada and back, stopping off for saltwater taffy along the Delaware Bay. Birdkill is a substantial problem for wind farm operators. Efforts to put the red knot on the federal endangered species list will only make solving that problem harder. New Jersey, Delaware, Maryland and Virginia are all excited about the potential opportunities. Governor McDonnell (a Virginia Republican) wants to make Virginia the Energy Capital of the East Coast.   Governor O'Malley (a Maryland Democrat) noted:  “We need the energy. We have the resources. We need the jobs, and we need a more renewable and cleaner, greener future for our kids.”   The Lease Form.  To streamline the issuance of wind farm leases on the Outer Continental Shelf the Department's Bureau of Ocean Energy Management put together a "first-of-its-kind" lease form, BOEM Form 0008.  Comments were solicited last fall and they were limited.  One that was significant was that lessees should make available data they collect.  Certain wind data could be kept as proprietary and confidential.  The Form is silent on that subject.  Notwithstanding, the wind energy industry is enthusiastic about the Form.  Comments by The Offshore Wind Development Coalition felt that with 15 offshore wind projects on the blocks in the U.S., the Form "will provide an essential ingredient for continued progress."      The Calls.  The Department of Interior also issued a "Call for Information and Nominations" for almost 80,000 acres approximately 10 miles off Ocean City, Maryland, and for a little more than 110,000 acres 23 miles off Virginia Beach, Virginia.   The Calls solicit any additional lease nominations and request public comments about "site conditions, resources and other existing uses of the identified area that would be relevant to BOEM’s potential leasing and development authorization process."  An earlier solicitation of interest for Maryland obtained nine "indications of interest" for commercial leases.  This interest is local, interstate and international.  The achievement of Maryland is the result of sustained effort to get to this point.  Since 2009, in a "state interagency marine spatial planning process" the Maryland Department of Natural Resources (DNR) worked  with "resource experts, user groups, The Nature Conservancy (TNC), Towson University and the Maryland Energy Administration (MEA) to compile data and information about habitats, human uses, and resources offshore Maryland." Offshore wind farms are coming. "Blow the man down" is a 19th Century sea shanty chronicling the rough life of a mate aboard sailing packets plying the North Atlantic.  It may be time to update the reference.

Regulation | Renewable Energy | Wind Energy

The Maryland Court of Appeals Looks at Models and Likes What it Sees - People's Insurance Counsel Division v. Allstate Insurance Co.: Affirmed

January 28, 2012 21:59
by J. Wylie Donald
Notwithstanding that millions tune in to the long-running reality TV show America's Next Top Model, the real modeling action is not in Hollywood.  Instead, it is on computer mainframes churning out annual simulations of 100,000 years or more of catastrophes such as hurricanes, earthquakes and terrorist attacks. Such analysis drew the attention of the Maryland Court of Appeals in its seminal opinion last Wednesday in People's Insurance Counsel Division v. Allstate Insurance Co. (attached), which affirmed the appropriateness of modeling in an insurer's decision to issue, or not, homeowners' insurance policies. The facts in Allstate were relatively simple. In 2006 Allstate determined that it would no longer write homeowners' policies on Maryland properties within one mile of the Atlantic Ocean. It subsequently extended that decision to completely exclude from new policies five Maryland counties, and portions of an additional six counties (all identified by zip code). It relied on a model developed by Applied Insurance Research, Inc. (AIR), which showed that the hurricane losses Allstate would suffer in the identified zip code areas were too high. Dutifully Allstate filed the appropriate papers with the Maryland Insurance Administration. The Administration found nothing exceptional about the application. The People's Insurance Counsel Division (PICD) (a part of the Office of the Attorney General) did, however, and requested a hearing.  It lost before the Commissioner of Insurance, then before the Circuit Court and again before the Court of Special Appeals (see our post).   PICD then appealed to Maryland's highest court and argued before the Court of Appeals that Allstate had failed to meet its burden of showing that its decision was not "arbitrary, capricious or unfairly discriminatory."  See Md. Ins. Code § 27-501(a)(1).   Following from that, PICD further argued that the designation of areas by zip code did not have an objective basis and therefore was arbitrary and unreasonable. See Md. Ins. Code § 19-107(a).  Allstate's proofs consisted primarily of computer modeling evidence, which the Commissioner found sufficient. Much of the opinion is directed to the parsing of Maryland's Insurance Code and its legislative history to determine whether § 27-501 even applied (the Court of Special Appeals had found it did not, and the Court of Appeals reversed that portion of the decision). We leave it to the insurance blogosphere to address that further. What is of interest to this readership is how modeling came into the decision and where modeling stands as a result. In the proceeding Allstate offered a model that simulates hurricanes from genesis to decay and the damages that would be suffered.  Basically, AIR modelers "developed mathematical functions that describe the interaction between buildings and their contents and the local intensity to which they are exposed." PICD at 7.  Allstate established with expert evidence that catastrophe risk is not diversified ("adding additional catastrophe risk does not reduce overall risk because of pooling but actually increases the overall risk") and that historical loss data is incomplete and outdated "making it difficult to estimate losses."  PICD at 7.  Accordingly, "it has become standard practice for insurance companies to use catastrophe models to anticipate the likelihood and severity of potential future catastrophes before they occur." PICD at 5-6. The advantages of modeling are substantial;  (1) It was able to capture the effects on catastrophic loss distribution of changes over time in population patterns, building codes, amounts insured, and construction costs;(2) It provides a complete picture of the probable distribution of losses rather than just estimates of probable maximum losses; (3) Because simulation models can be tested more easily than other approaches, it leads to greater stability in estimating expected annual losses;(4) It provides a means to determine the impact of new scientific information; and(5) It provides a framework for performing sensitivity analyses and “what if” studies. PICD at 6 As the Court noted, "By using computer models, they can get 100,000 years of simulated loss experience, which is good not just for State-wide pricing but also for loss characteristics related to hurricanes down to the ZIP Code level." PICD at 7.  PICD retained an actuary to rebut Allstate's proofs; he testified with respect to "actuarial science." He was hampered, perhaps fatally, when the Commissioner refused to allow him "to express any opinion with respect to the model that formed the basis of Allstate's amended filing." PICD at 11. We were not there but the Court of Appeals paints a picture of a non-committal expert. He offered that the decision to not write new policies was unreasonable "'because there is no showing that it is reasonable.'" And he "declined to choose" the method Allstate should have chosen to reduce its risk.  PICD at 11. In a post-hearing submission PICD argued that "Allstate was required to produce valid statistical data demonstrating the probability of a hurricane sufficiently strong to cause catastrophic damage actually making landfall in Maryland and that it failed to do so."  PICD at 23.  The statistical standard was based on dicta in an earlier Court of Special Appeals decision, Crumlish v Ins. Comm'r, 520 A.2d 738 (1987), which the Commisioner and the Court distinguished.  First, Crumlish's requirement for statistical evidence was not a universal requirement. PICD at 25. More significant was the "catchall" exception added to § 27-501 which established a "standard approved by the Commissioner that is based on factors that adversely affect the losses or expenses of the insurer under its approved rating plan and for which statistical validation is unavailable or is unduly burdensome." PICD at 25. "That is what the Commissioner did in this case."  PICD at 25.  In other words, the Commissioner found Allstate's evidence met its burden of demonstrating that its use of modeling as the basis to stop writing policies in certain areas was reasonably related to its business and economic purposes and was not discriminatory.  The dissent would have adopted the Crumlish dicta and required Allstate to offer statistical evidence concerning the landfall of destructive hurricanes in Maryland. PICD, dissent at 5.  Such an assessment was either to be based on the historical record (an impossibility as no hurricane had ever made landfall in Maryland) or "climate science" (which one would think would include modeling).  PICD, dissent at 9, 10.  According to the dissent, all Allstate provided was a computation of the "relative risk" of a hurricane landfall in Maryland as once in 25,000 years based on the worst 5% of hurricanes that made landfall in North Carolina, Virginia, and Delaware.  Allstate justified its decision based on hypothetical hurricanes, i.e., a model.  PICD, dissent at 7. The Court properly rejected this distinction.  The use of probabilistic catastrophe risk modeling came of age following the destruction caused by Hurricane Andrew in South Florida in 1992. As stated by modeler RMS in its 2008 A Guide to Catastrophe Modeling (p6):  "It became clear that a probabilistic approach to loss analysis was the most appropriate way to manage catastrophe risk. Hurricane Andrew illustrated that the actuarial approach to managing catastrophe risk was insufficient; a more sophisticated modeling approach was needed."  Another modeling firm, EQECat, put it this way:  "The main concern for all users is the uncertainties in the models. Some time ago, the only way to estimate a probable loss was to trust few statistical studies of past losses from some historical events and or on the experience of the underwriter. The uncertainty in these models was quite large as confirmed once a new event [such as Hurricane Andrew] took place. The main problem is that there is not enough historical data, and the standard actuarial techniques of loss estimation are inappropriate for catastrophe losses."  One of the purposes of catastrophe modeling is to assist the user (often an insurer) in avoiding the alliteratively named "risk of ruin."  If all the industry is using a tool that can minimize the risk of run, it would ill-behoove a court to take away that tool.  In Allstate the Maryland Court of Appeals agreed.  Nevertheless, if one is looking for guidance on how modeling will be received in the courts, there is one significant question left unresolved by this decision:  how will competing models be treated?  PCID's expert seems to have been completely out of his league. Whatever his actuarial credentials, if the issue is modeling then a modeling expert is needed. And at the very least the AIR model was subject to challenge. In a review published just this month, Assessing US Hurricane Risk: Do the Models Make Sense?, AIR takes on its competition, RMS, and states:  "with this latest round of updates, we [modelers] find ourselves more divergent in our views of risk than ever." (p5)  As one example of this divergence, "Catastrophe modeling companies have vastly different views on what influence sea surface temperatures (SSTs) in the Atlantic Ocean have on U.S. hurricane landfall risk." (p12).  If AIR is correct, perhaps application of the RMS model would have altered the list of excluded zip codes. More fundamentally, does the uncertainty established by competing models (and that is inherent in modeling) impose an unavoidable and unacceptable arbitrariness in application?  That is for another day.  For the moment, modeling companies and those who use them likely will proceed full speed ahead. Post scriptum - Climate change seems to have been a subject not to be discussed.  As noted by the dissent, if Allstate was worried about the science of climate change, it didn't bring it up.  Nevertheless, the dissent did bring it up and asserted that meteorological change occasioned by climate change could be a legitimate basis for Allstate's decision.  The modeling firms think otherwise. Eqecat's CEO Bill Keogh has stated because of the uncertainty associated with climate change's effect on hurricanes, " it has no role in catastrophe risk modeling." Peoples Insurance Counsel Division v Allstate Insurance Company.pdf (78.07 kb)

Climate Change | Climate Change Effects | Insurance | Regulation

Soldiering On: The Western Climate Initiative and RGGI in 2012 and Beyond

January 8, 2012 20:47
by J. Wylie Donald
Last week a big step forward was taken by the Western Climate Initiative (WCI). Or what remains of it. On January 1, 2012 members were to establish binding caps on emissions of carbon dioxide from electricity generators and certain industrial sources, issue allowances for those emissions and then permit the trading of those allowances.  At least that was the plan back in September 2008 when  Design Recommendations for the WCI Regional Cap-and-Trade Program was released and when climate change response was popular and states had money in their budgets.  Since then Arizona, Montana New Mexico, Oregon, Washington and Utah have withdrawn from the WCI leaving only California and four Canadian provinces.  As the WCI puts it:  "British Columbia, California, Ontario, Quebec and Manitoba are continuing to work together through the Western Climate Initiative to develop and harmonize their emissions trading program policies."  And of those remaining only two (California and Quebec) are moving forward with a cap-and-trade program. So is this the end of regional greenhouse gas initiatives?  After all, on the East Coast New Jersey has bolted from the Regional Greenhouse Gas Initiative, while New Hampshire attempted to bolt and New York faces a lawsuit (attached) aimed at ejecting New York. We think not.  Our reasoning is three fold.  First, climate change is not going away.  We are going to have to do something.  The theory behind regional initiatives -- that they act as a laboratory for experimenting with greenhouse gas regulation -- remains valid.  And until federal legislation takes over (certainly not in 2012), regional initiatives are going to be the only game in town.  Second, organizations exist around the globe to develop manufacturing or construction or laboratory or telecommunications or you-name-it standards.   Companies ignore these organizations at their peril and often join so they can influence the result and at a minimum have inside knowledge of what the standard is and how it came to be.  Regional initiatives operate in a similar manner where the development of the rules and the issues behind them are  critical in effectively implementing the rules.  States and provinces that are out in front on climate change issues are going to have two advantages going forward.  They will have a program in place when federal rules ultimately come along; that primacy will undoubtedly influence the federal program.  And they will have experience implementing the program which likely will translate into a more effective program when compared with newly minted greenhouse gas regulators. And third they are reported to add economic benefit.  In November RGGI released a report by The Analysis Group that analyzed  the effect of RGGI:   "The Economic Impacts of the Regional Greenhouse Gas Initiative on Ten Northeast and Mid-Atlantic States."    To quote the report's authors: Key findings include: ■The regional economy gains more than $1.6 billion in economic value added (reflecting the difference between total revenues in the overall economy, less the cost to produce goods and services)■Customers save nearly $1.1 billion on electricity bills, and an additional $174 million on natural gas and heating oil bills, for a total of $1.3 billion in savings over the next decade through installation of energy efficiency measures using funding from RGGI auction proceeds to date■16,000 jobs are created region wide■Reduced demand for fossil fuels keeps more than $765 million in the local economy■Power plant owners experience $1.6 billion in lower revenue over time, although they overall had higher revenues than costs as a result of RGGI during the 2009-2011 period This is not a surprise.  By limiting the emission of carbon dioxide, RGGI drove up, at least initially, the cost of electricity production.  This had the effect of promoting more efficient use of electricity.  So practitioners would do well to pay attention to California's efforts.  It is likely to be the source of what ultimately happens in Washington. Thrun v. Cuomo (RGGI Complaint).pdf (1.34 mb)

Carbon Dioxide | Carbon Emissions | Greenhouse Gases | Regulation

2011: Notwithstanding Extreme Weather, US Climate Policy Does Not Move Forward

December 30, 2011 22:01
by J. Wylie Donald
NOAA reported that 2011 was one for the record books:  12 weather and climate-related disasters each causing over $1 billion in damage.  One might expect (or hope) that a national climate change policy would be coming into place to prevent repeating or setting a new record.  One would be disappointed.  U.S. climate policy is "uncertain," to quote Michael Morris, CEO of American Electric Power, "dysfunctional" is the word applied by Resources for the Future, "hamstrung" is how the chief UN climate change negotiator and Executive Secretary of the UNFCCC, Christiana Figueres, calls it.   We don't disagree with these viewpoints; they are accurate.  But if a response to climate change is the goal, it is worse than these commenters are acknowledging because not only has Congress shown that it is incapable of getting anything done, other avenues are not delivering either.  As the year expires we thought it might be helpful to sift through the year's detritus and assess  the status of attempts to reduce carbon dioxide emissions, distinct from overt attempts like passing laws and adopting regulations. 1. Tax emissions - Some will remember our blog on the federal lawsuit brought by Mirant Corp. against Montgomery County challenging the County's tax on carbon emissions which fell only on Mirant. The County challenged the federal court's jurisdiction and won before the federal district court. In June, however, the Fourth Circuit reversed.  With that Montgomery County folded its tent and abandoned its carbon tax. 2. Favor renewable energy - The inexorable scrutiny of the markets has proved the undoing of several former high-flying renewable energy ventures. Most well-known is the debacle with Solyndra LLC, whose well-publicized collapse generated scrutiny by the FBI and Congress. Others that have failed with less limelight in 2011 include numerous solar companies (Solar Millennium, Stirling Energy Systems, Evergreen Solar, Spectrawatt), as well as ventures in wind (Skycon), energy storage (Beacon Power), and biofulels (Range Fuels). 3. Impose liability for emissions of carbon dioxide - The results here are mixed.  Everyone points to American Electric Power v Connecticut for the principle that for greenhouse gas liability claims the federal common law of nuisance has been displaced by federal regulation. They could equally point to Connecticut v AEP before the Second Circuit for the principle that the political question doctrine does not bar these types of claims or to the Fifth Circuit panel in Comer v Murphy Oil USA that held similarly.  However, even if the cases are permitted to move forward, they face daunting problems in proof of causation. 4. Force state action to regulate carbon dioxide - We blogged last May and just this month about the tidal wave of litigation unleashed by Our Children's Trust, an Oregon environmental group that had orchestrated a dozen suits asserting the defendant States had an obligation under the public trust doctrine to restrain carbon dioxide emissions, as well as regulatory petitions in about 40 jurisdictions.  Time has not been good to OCT. First, its petitions have been denied by at least 23 agencies (Arkansas, Connecticut, Georgia. Hawaii, Idaho, Illinois, Iowa, Louisiana, Maine, Maryland, Michigan, Nevada, New Hampshire, North Dakota, Ohio, Oklahoma, Rhode Island, South Carolina, South Dakota, Tennessee, Texas, Utah, and Wyoming).  Where OCT filed lawsuits, three states (Arkansas, Minnesota and New Mexico) responded with motions to dismiss.  The lawsuit against Montana was dismissed. In the federal lawsuit, the plaintiffs lost a motion to transfer. 5. Reach regional agreements - With great fanfare the Regional Greenhouse Gas Initiative was launched in 2005. Despite a recent study that claims significant economic benefit to the states in RGGI, its future success is unclear. New Jersey pulled out, New Hampshire tried to leave but the governor vetoed the bill. In New York, there is a court challenge.  6. Voluntarily trade carbon dioxide emissions credits - The only carbon exchange in North America came to an end in 2010 when the Chicago Climate Exchange closed its doors.  A shadow of its former self, the CCX now registers verified emission reductions based on a comprehensive set of established protocols. 7. Develop carbon capture and storage - The most prominent project in the US came to a halt in July when American Electric Power concluded not to build a full-scale CCS plant at its Mountaineer, West Virginia plant. As noted above, AEP explained its decision as based on the uncertainty of US climate policy.  The lack of direction in American climate change response hurts business. AEP walked away from a $300 million Department of Energy match.  It didn't help that the Virginia consumer advocate, in successfully arguing against including CCS costs in the rate base, asserted:  “Any potential benefit is speculative and outweighed by the enormous cost of the pilot project.” Some may think no policy is the best policy.  We think otherwise.  Climate change is happening.  There will be a response.  All will benefit if that response is choreographed over time, rather than rushed into when political consensus ultimately concludes that something must be done NOW.  Maybe in 2012?  Happy New Year. 

Carbon Dioxide | Carbon Emissions | Climate Change | Climate Change Litigation | Legislation | Regulation | Renewable Energy | Weather | Year in Review


The business case for the development of renewable energy projects, from biodiesel and ethanol to wind, solar, and distributed generation, is more compelling than ever as tax and regulatory incentives combine to attract investments. Emerging issues in environmental law and increasingly recognized principles of corporate social responsibility are encouraging public companies to voluntarily reduce greenhouse gas emissions, install clean energy alternatives, and invest overseas in projects under the Kyoto Protocol to respond to climate change concerns.

Click here for more information and a list of our group members.


© 2017 McCarter & English, LLP. All Rights Reserved. disclaimer
navbottom image