Munis Question Need for GHG Cap & Trade Program

By Published On: November 9, 2007

The nation’s largest municipal utility is questioning the wisdom of placing the California power industry under a greenhouse cap-and-trade program. Instead, the Los Angeles Department of Water & Power urged regulators November 5 to mandate emissions performance standards on the utility industry to reach the 2020 climate protection target under California’s law, AB 32. “We are not interested in trading for the sake of trading,” said Leilani Johnson, LADWP environmental supervisor. The department’s skepticism about the need to place the power sector under a cap-and-trade program was shared by some other munis. Most of the power sector’s emissions reductions are to come from existing laws and programs–like the renewables portfolio standard, the ban on new long-term coal power contracts for state utilities, and energy efficiency efforts–pointed out Bud Beebe, Sacramento Municipal Utility District regulatory coordinator. These requirements eliminate the need to fully place utilities under a cap-and-trade program, he said. To the extent the industry is covered at all, he suggested that any cap-and-trade program should only include at most 5 percent of the industry’s emissions allocations. The two munis voiced their concerns about cap-and-trade at a joint workshop of the California Public Utilities Commission and California Energy Commission in Sacramento called to air viewpoints on how to allocate greenhouse gas emissions allowances. The two agencies must develop recommendations for the California Air Resources Board for how to regulate the power sector under AB 32. It is widely expected that the state will place the power industry under a cap-and-trade program, in which emissions allowances can be bought and sold. Doing so, pointed out Gary Stern, Southern California Edison director of market monitoring and analysis, effectively will move money around between different industry players. Some will pay and some will gain. “This is the type of problem that doesn’t really have a right answer,” he said. The best goal is to allot emission allowances in a way that minimizes costs to various segments of the power industry, such as generators facing expenses to cut emissions, Stern explained. However, some questioned whether regulators should seek to cushion the financial blow of the climate change law. For instance, the Northern California Power Agency recommended that the allowance distributions be based on power sales by utilities, not emission levels. This would reward cleaner generation, said Scott Tomashefsky, agency regulatory affairs manager. At the same time, it would monetarily penalize high emissions generation. “It is an issue that deals with low carbon utilities and high carbon utilities,” he said. “There will be winners and losers.” The Northern California public power agencies–which have more access to hydropower–generally have lower carbon emissions than Southern California munis, which are heavily dependent on coal. The joint panel also took testimony on whether the state should give out the emissions allocations for free to power companies and other industries, or auction emissions allowances. Many voiced support for an auction. Selling emissions allowances through an auction “is the most transparent means” of allocating emissions allowances, said Devra Wang, Natural Resources Defense Council California energy program director. She outlined possible models for administering the proceeds of an auction. In one alternative, the state would administer the proceeds directly. The state, she said, could use the money to offset the cost of AB 32 on low-income utility customers and to support greenhouse gas reduction projects. In another alternative, utilities would get most of the money rebated to them to finance emissions reduction programs. Others denounced the auction concept. LADWP “adamantly” opposes any auction of emissions allowances by the state, said Johnson, because it would create great costs for the department. Southern California munis agreed. Auctioning allowances, said Norman Pederson, Southern California Public Power Authority attorney, would unfairly penalize munis in the region–and their customers–which built many of their major power plants during the 1970s to serve their fast growing populations. They built those plants, he said, at a time when the federal government preferred to develop domestic coal as an energy resource during the era of the Middle East oil embargoes. Nuclear power was not politically acceptable, hydropower was of limited availability in the arid area, and the nation wanted to reserve limited natural gas supplies for home heating. Pederson said that utilities should not now be penalized under AB 32 because of their history and geographic location. Like LADWP, he urged regulators to base emission allocations on the historical emissions patterns of utilities.

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