In Ian Fleming’s James Bond thriller Casino Royale, a colorful cast of characters faces off in Montenegro at a winner-take-all poker game arranged by a shady international banker. The banker is attempting to win back deposits he has taken in from a violent guerilla group that he lost in a stock fraud scheme gone awry. When the game ends, 007 wins, but instantly the chase for his money ensues. Earlier this month, representatives of California’s power industry sat down for what promises to be an even higher stakes poker game. While not as glamorous as Fleming’s fictional world of double agents, fraudulent financiers, and guerilla fighters, it promises to be equally, if not more, intriguing. Unlike Fleming’s imaginary game, this one is real--it determines who plays and who pays as California establishes a carbon trading market for the power industry. Will generators or utilities become the sweepstakes winners? How will the environment fare? Do utility customers have a seat at the table? And once the challenge of setting the rules ends, the chase for billions of dollars will begin. The first round in the big game came June 22 as regulators charged with devising a carbon cap-and-trade program sat down with power industry executives and a few environmentalists to talk about setting an emissions baseline for the electricity industry. The baseline--which is an emission cap that declines over time--is to play a significant part in achieving the mandated 25 percent reduction in greenhouse gas emissions by 2020 under AB 32, California’s climate protection law. The cut is supposed to bring the state’s emissions levels back down to where they were in 1990. At issue is whether the baseline should reflect historical emissions, electrical output, or some sort of best technology standard. Also key is who the state will directly regulate under an emissions baseline: utilities, generators, or both? Regulators, however, have left that question off the table for the moment. They continue to flesh out their plan for a load-based carbon cap that would regulate utilities instead of a first seller approach that mainly would regulate instate generators and wholesale power importers. Other combinations have been suggested too (Circuit, June 15, 2007) Not unexpectedly, the players in Sacramento held their cards close to their vests as a panel of regulators dealt hands consisting of various baseline scenarios. But at the end of the day, these were the players’ cards: - Pacific Gas & Electric’s ante is up due to a surfeit of hydropower. - Southern California publicly-owned utilities’ chips are down due to investments in coal power. -Southern California Edison and San Diego Gas & Electric held back a bit in order to size up the players. -Independent generators started with fewer chips, but Calpine upped the ante because its plants are relatively new and clean. -Northern California public utilities garrulously asked up front for credits. -Environmentalists played with other people’s money but were reluctant to admit it. -Meanwhile, ratepayers smoked on the balcony, or otherwise were nowhere to be seen. In detail, here are the players’ strategies so far: Pacific Gas & Electric’s plan is to set a baseline for load-serving entities according to their electricity sales. The state then would issue emissions rights, or credits, to public and investor-owned utilities accordingly. Next, it would require generators to buy the credits from the utilities to cover the greenhouse gases they emit as they provide them with needed power. PG&E also claims that the 1990 estimate of its emissions by the California Energy Commission is too low because it relied on more coal power and less hydropower. Because hydro power provides about a fifth of PG&E’s power, the company would become a big winner under its proposal--able to cash in by supplying the state carbon market with emissions credits. Should it be correct about its 1990 emissions, the utility could continue to be a net seller of credits after the 2020 deadline for cutting emissions, since it likely would not have to cut its greenhouse gases quite as much as if it used more hydropower in 1990. Southern California municipal utilities want the state to set the baseline according to historic emissions. These are high for the munis because of their reliance on out-of-state coal power plants, which pump out large volumes of carbon dioxide. However, if historic emissions were used, the munis would immediately receive enough credits to cover their emissions, which they could bring down gradually as their caps declined. They warned that under any baseline set according to power output or sales, they would face the potential cost of immediately having to purchase credits, which would leave them short of the money need to invest in cleaner generating plants. Southern California Edison sees some merit in setting baselines according to historic emissions, but it was not ready to take a definitive position. The company is leading in renewable energy, with more projects due to come on line. It also closed down its Mohave coal plant last year. A baseline that reflects even fairly recent emissions could leave it with plenty of credits. San Diego Gas & Electric remained mum. Independent Energy Producers want the baseline to reflect historic emissions. Any immediate reduction requirement could create dislocations for some generators. Moreover, since many generators operate under long-term power sales contracts with utilities, they could not easily pass on the cost of purchasing credits to cover any excess emissions or cleaning up their plants. Instead, they instead would have to absorb the costs. Calpine requests regulators set any baseline for generators based on power production. With a relatively clean fleet of new, efficient combined cycle power plants. The company would gain a leg up on many of its competitors, some of which still operate inefficient old gas plants, coal plants, or newer but less efficient simple cycle gas plants. Northern California public utilities want to receive credit under their baselines for investments in cleaner power plants they made prior to the past few years. If regulators used emissions in only the most recent few years to determine baselines, it would effectively stack the deck against them by denying emissions credit for these early action greenhouse gas reduction measures. Environmentalists support early action to reduce emissions. This connotes setting a baseline according to performance criteria rather than past emissions. To ameliorate the costs, the state could distribute emissions credits through a mixed system that would involve both auction and free allocation. Utility ratepayers presumably were either unaware the game had started or are oblivious to the stakes, assuaged, perhaps, by political promises that there will be no cost in solving the global warming problem, just new jobs and rising incomes. In their absence, one of the few bursts of laughter came when Natural Resources Defense Council scientist Audrey Chang suggested regulators could set the carbon baseline in a way that prevents power price increases. Only in Casino Sacramento. Surely, Ian Fleming would have known better.
