LADWP Wary of Future Deregulation

As the California Air Resources Board struggles to draft a blueprint by June for carrying out the state’s climate protection law, a cap-and-trade plan for the power industry appears to be foundering amid concerns over apparent accommodation of future deregulation. Some say opposition to the plan, devised largely by the California Public Utilities Commission, has slowed the commission’s work on an options paper for how to allocate emissions rights to the industry. It originally was expected to be released last week, but now is set to be released in time for an April 21, 2008, public workshop on “allocation.” Basically “allocation” is a distribution of greenhouse gas emissions credits to a potential market. It is currently unclear how those credits will be granted. “We’re laying out options for doing allocations and there are winners and losers in each case,” said Julie Fitch, CPUC director of strategic planning. She added that the short delay is simply related to the complex nature of the task. Whatever the CPUC may recommend on allocation, the commission is facing greater scrutiny from elected officials after the Los Angeles Department of Water & Power “raised an alarm” about the plan, David Nahai, LADWP general manager, told Circuit. “We’ve got some fundamental concerns about where the PUC is going,” he said. Key among them is the potential cost of purchasing allowances in any auction. The options outlined in the upcoming paper likely are to include auctioning 100 percent of the allowances (a scheme in which those who are regulated under a cap-and-trade system would have to purchase rights from the state to emit any greenhouse gases); distributing all emissions rights for free (an option under which the state would provide regulated power companies emissions rights for free, which they could then sell on the market if they didn’t need them to cover their emissions); and providing allowances based on an emissions/MW of power performance standard (a concept under which operators of plants that are cleaner than the standard could sell credits, but operators with plants that did not meet the standard would have to purchase credits). The paper is expected to include various permutations of these options too, according Fitch. Fitch said the CPUC also is grappling with the how the state should use the revenues produced by any auction of allowances. “We’ve already said a majority of revenues would go back [to utilities],” she said. They could then use the money to cut greenhouse gas emissions. Regulators assume utilities could invest in efficiency, renewables, and cleaning up carbon-heavy power. However, the formula used to apportion the money remains in play, with a number of options possible, she said. That includes redistribution of the money based on historical emissions or according to a performance-based criterion. The Los Angeles DWP points out that money also could be allotted to utilities based on their power loads. If the auction revenue then was redistributed to utilities based on their power load or other possible criteria, Pacific Gas & Electric would garner much of the money paid by the department, noted the muni’s Nahai. Los Angeles mayor Antonio Villaraigosa seized on another concern. In a letter to the governor following CPUC and the California Energy Commission approval of the plan, he wrote that it would “leave the door open for further deregulation of the California wholesale electric market.” The March 13 CPUC recommendation said that regulating deliverers of power to the grid would best accommodate the California Independent System Operator’s upcoming market redesign, which would seek to create viable day-ahead and real time markets for electricity. LADWP is not part of CAISO, clarified Stephanie McCorkle, grid operator spokesperson. Further, the CPUC said its recommendation would best accommodate any move to restore direct access, a policy the commission is reconsidering in response to a petition by the Alliance for Retail Energy Markets. State law prevents restoration of direct access until the Department of Water Resources power contracts expire. The department entered those contracts on behalf of broke utilities during the state energy crisis of 2000-01 expire. Because LADWP remains a vertically integrated utility that makes and distributes its own power and is not a part of CAISO, the muni questions why it should be subjected to a cap-and-trade program designed to accommodate the CAISO market and possible restoration of direct access. So in place of what the CPUC is recommending--which is a cap-and-trade program that regulates first deliverers of power to the grid and auctions off at least some of the emissions allowances--LADWP would like to see specific emissions reductions requirements for specific entities that provide flexible compliance mechanisms. Nahai said such a system could be coupled with a cap-and-trade approach that places sources under a declining cap and establishes an emissions credit market primarily for sources when they cannot meet their emission reduction obligations. Instead, he said, the CPUC has proposed a system that “really opens the possibilities for gaming and manipulation.” Editors’ note: For a more detailed version of this story, please see our sister publication E=MC2--Energy Meets Climate Challenge. You can find it at www.energymeetsclimate.com

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LADWP Wary of Future Deregulation

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