Power plant operators—rather than utilities—should be responsible for cutting greenhouse gas emissions, the California Public Utilities Commission recommended February 8 in a draft ruling. “Now that the CPUC has seemingly identified the point of regulation we can move to the more critical discussion of how you do it,” said Steven Kelly, Independent Energy Producers policy director. Independent generators and investor-owned utilities support the proposal, partly because they consider it more compatible with the California Independent System Operator market. It also would not be overturned by an anticipated federal cap-and-trade system expected to target the emission source. “We think the proposed decision is an effective way to meet our state’s climate change goals,” said Keeley Wachs, Pacific Gas & Electric spokesperson. In a proposal by CPUC president Mike Peevey, entities that deliver power to the state’s grid would be required to meet greenhouse gas reduction mandates. It reasons that this strategy would better thwart federal preemption challenges given that California imports a large amount of power. It is also said to be easier to verify emission reductions at this point. The third claim is that the plan would fit better into an emerging multi-state cap-and-trade program in the West. A geographically-broader trading scheme, like the state’s, is expected to cover more than the electricity sector. “The deliverer system provides for the environmental integrity of the system covering imported power as well as in-state generation,” stated the CPUC in its draft ruling. About 20 percent of California’s power is imported, much of it from plants with a carbon footprint, like coal-fired units. Those plants are estimated to emit half of the greenhouse gases attributable to power usage in the state. Once final, the commission plans to send its recommendation to the California Air Resources Board, which has final say on implementing and enforcing the state’s climate change law, AB 32. The Air Board is required to develop a master plan for carrying out the law that seeks to curb emissions from power plants, other stationary polluting sources, and possibly the transportation sector by the end of this year. Not all stakeholders were pleased. The proposal “guts the groundbreaking environmental goals envisioned by AB 32 and sets California on a path to choose profits over the environment,” stated David Nahai, Los Angeles Department of Water & Power general manager. Regulating the generating units that send power into the transmission system is expected to cost the LADWP dearly because of its heavy dependence on out-of-state coal power plants. The California Municipal Utilities Association also objects to the plan because it expects it would be burdensome for vertically integrated utilities. Most munis, unlike investor-owned utilities, still manage transmission, distribution, and generation. These agencies, which are not regulated by the commission, don’t oppose Air Board greenhouse gas reduction mandates, but they don’t want to be told how to achieve them. Munis, which vary in size, location and power mix, want to be able to choose the least costly and most appropriate reduction strategies, said Jerry Jordan, CMUA executive director. The Air Board has sought advice from the CPUC on how best to regulate the energy sector. For months, energy regulators have been weighing where to put the emissions reduction burden to make way for a carbon cap-and-trade market, be it on utilities, known as a load-based cap, or on generating units, known as the “first seller” approach. The Air Board’s defunct Market Advisory Committee recommended that first sellers into the grid—be they generators, utilities, or power traders—be held responsible for cutting greenhouse gases under AB 32. Just how this proposal targeting the “deliverer” to the grid differs from the first seller strategy is not clear. Some think it may provide more legal protection. It may also remove the carbon reduction burden from power plant owners that operate under gas tolling agreements and thus have little say over when they run, such as some AES power plants. (Gas tolling is a contract for supplying the fuel to power plants.) The ruling asserts it can help avoid legal challenges based on federal preemption claims under the Federal Power Act and Interstate Commerce Clause because it is setting environmental regulations and not ones directed at wholesale power transactions. In addition, targeting “deliverers” of power to the grid equally—whether in-state or out-of-state—weakens Commerce Clause discrimination claims. “Pollution control requirements normally impose costs on participants in wholesale energy markets (such as generators) but that factor does not preempt states from imposing pollution costs,” it notes. The CPUC proposal urges the Air Board to mandate energy efficiency standards for publicly owned utilities. If the Air Board fears it lacks the authority to order municipal power agencies to meet efficiency targets, the CPUC suggests it seek legislation that would give it the authority to do so. It further backs raising the 20 percent renewable requirement for both private and public utilities. Oddly, the ruling does not specifically endorse the 33 percent target set out in the energy agencies’ Energy Action Plan, which the CPUC helped develop. “We commend the commission for holding publicly owned utilities to the same energy efficiency and renewable standards as investor-owned utilities to create a level playing field,” said San Diego Gas & Electric spokesperson Denise King. CMUA’s Jordon balked, noting that the munis already are required to meet efficiency and renewable targets. Legislation was passed two years ago that mandates munis meet efficiency targets. But, the renewable portfolio standard law is less stringent for munis than for investor-owned utilities, though a number of them are striving to meet or beat the 20 percent RPS standard. The draft commission ruling soft pedals auctioning emission allowances. Selling emissions via auction rather than giving them away is supposed to create a more level playing field by allowing all power producers to buy carbon emission credits. An auction also would generate revenue that can be invested in measures to curb global warming. The ruling only says emission auctions should be used to launch a cap-and-trade system, but does not specify how large a role auctions should play. The draft proposal also urges the Air Board to begin setting the ground rules for a cap-and-trade program for the electricity sector—but not the natural gas industry—to help the state lighten its carbon footprint. Carbon reductions from the natural gas sector are expected to come from mandatory energy efficiency measures. “In order to have the AB 32 program in place by 2012, design of all mechanisms should begin now; we recommend against any delay or a wait-and see approach.” Emission reductions from a state cap-and-trade system are expected to be relatively small, with the emphasis placed on gaining experience in a carbon trading market. The CPUC is accepting comments on the draft ruling for 30 days.
