California utilities can expect to face a hybrid regulatory system under the state’s new climate change law. That could mean that new rules would indirectly control power generators seeking to serve the California market through investor-owned utilities. The hybrid approach would include a load-based cap under which utilities would be able to trade carbon emissions allowances, Nancy Ryan, adviser to California Public Utilities Commission president Mike Peevey, told the Western Power Trading Forum February 23. “It’s really a procurement framework,” she explained. Each of the state’s utilities would have to stay under a greenhouse gas emissions limit for the power they provide to their customers. As with the state’s renewables portfolio standard, under a load-based cap, each utility would have to plan its resource portfolio – including power procurement and directly owned generation plants – to limit greenhouse gas emissions from electricity made to meet its needs. Under an accompanying trading program, utilities that limit those emissions more than needed would be able to sell any emissions allowances to those who need them to cover emissions exceeding their respective caps. If the state regulated generators directly, they could pack up and leave the state to escape greenhouse gas limits, a problem characterized by regulators as “leakage.” The load-based cap prevents leakage by turning the utilities into de facto regulators of generators. Regulators also expect that new direct rules on utilities will be needed to meet the state’s 25 percent greenhouse gas reduction goals by 2020, according to Ryan. These may include requiring them to increase their percentage of renewable energy above and beyond the current renewables portfolio standard requirement and to step up energy-efficiency programs, she said. Utilities and generators are closely following the state process to develop climate change policies and have a number of concerns about how to meet potential greenhouse gas reduction requirements. “The only way I know how to do it is not to serve the load,” John Fielder, Southern California Edison president, said. He added that Edison’s load is increasing by 2 percent annually and that its peak load is growing by between 5 and 6 percent. Yet, he noted, investor-owned utilities already represent about 10 percent of the state’s greenhouse gas emissions since they largely rely on gas-fired units and are moving into renewable energy. “It doesn’t seem like there’s that much reduction in the electric sector,” Fielder said. He added that he found it difficult to see how a cap-and-trade program would work if it was limited solely to the state’s utilities. He suggested that a tax might be a useful alternative. “I would tax every kilowatt-hour consumed and just collect the money and go buy offsets,” said the utility president. Others in the industry were more optimistic about a cap-and-trade program. “I’m pretty bullish,” said Gary Ackerman, Western Power Trading Forum executive director. However, he noted that creating a liquid trading market will require regulators to take an expansive approach. “The wider you can make it, the better,” he said, urging the state to link any California cap-and-trade program to other markets. To do so, the state should strongly consider using the United Nations clean-development mechanism protocols for certifying emissions offset credits, said Clare Breidenich, a consultant to the trade group on global warming policy issues. She said that would ensure, for instance, that California companies could easily trade credits with companies covered by the emerging Regional Greenhouse Gas Initiative in the Northeastern states and companies operating in nations under the Kyoto Protocol, the international pact on climate change. Regulators also must be willing to accept that they cannot perfectly account for emissions from electricity use in California but will have to base emissions reporting rules on “assumptions about power source mixes,” said Breidenich. Sources of power change at any given moment and cannot be perfectly traced throughout a grid that is interconnected across Western states and neighboring nations.