COM/MP1/ALJ/MEG/hkr DRAFT Agenda ID #5280

Ratesetting

Decision DRAFT DECISION OF COMMISSIONER PEEVEY
(Mailed 1/13/2006)

BEFORE THE PUBLIC UTILITIES COMMISSION OF THE STATE OF CALIFORNIA

Order Instituting Rulemaking to Promote Policy and Program Coordination and Integration in Electric Utility Resource Planning.

Rulemaking 04-04-003 (Filed April 1, 2004)

OPINION ON PROCUREMENT INCENTIVES FRAMEWORK

TABLE OF CONTENTS

Title Page

OPINION ON PROCUREMENT INCENTIVES FRAMEWORK 22

1. Summary 22

2. Background 55

3. Threshold Policy Issues 1010

3.1. Role of a Greenhouse Gas (GHG) Cap in Procurement Policies 1111

3.1.1. Positions of Parties 1111

3.1.2. Discussion 1414

3.2. Type of Cap on GHG Emissions 1616

3.2.1. Positions of Parties 1616

3.2.2. Discussion 1717

3.3. Applicability of Cap 1818

3.3.1. Positions of Parties 1818

3.3.2. Discussion 1919

3.4. Role of Financial Incentives 2121

3.4.1. Positions of Parties 2121

3.4.2. Discussion 2424

3.5. Interaction of GHG Cap and Financial Incentives 2626

3.5.1. Positions of Parties 2727

3.5.2. Discussion 2727

4. Implementation Issues 2828

4.1. GHG Emissions Baselines and Adjustments
to Reduction Requirements Over Time 2929

4.1.1. Positions of Parties 2929

4.1.2. Discussion 3131

4.2. Allocation of GHG Allowances 3434

4.2.1. Positions of Parties 3434

4.2.2. Discussion 3535

4.3. Flexible Compliance 3636

4.3.1. Positions of Parties 3636

4.3.1.1. Offsets 3636

4.3.1.2. Trading 3737

4.3.1.3. Banking and Borrowing 3838

4.3.2. Discussion 3838

4.4. Penalties 3939

4.4.1. Positions of Parties 3939

4.4.2. Discussion 4040

4.5. Emissions Registration 4040

4.5.1. Positions of Parties 4040

4.5.2. Discussion 4141

4.6. Continuation of GHG/Carbon Adder 4242

4.6.1. Positions of Parties 4242

4.6.2. Discussion 4242

4.7. Treatment of GHG Emissions From Natural Gas
for Purposes Other Than Electricity Generation 4343

5. Other Issues 4444

6. Next Steps 4545

7. Comments on Draft Decision 4545

8. Assignment of Proceeding 4646

Findings of Fact 4646

Conclusions of Law 5252

ORDER 5555

ATTACHMENT 1

OPINION ON PROCUREMENT INCENTIVES FRAMEWORK

1. Summary¹

Today we state our intent to develop a load-based cap on greenhouse gas (GHG) emissions for Pacific Gas and Electric Company (PG&E), San Diego Gas & Electric Company (SDG&E), Southern California Edison Company (SCE), and non-utility load serving entities (LSEs) that provide electric power to customers within these respondents' service territories. Over the longer term, we also intend to develop a GHG limitation program that includes emissions from the natural gas sector, as the requisite emission reporting and certification protocols become available.

As discussed in this decision, we will establish a baseline for the GHG emissions cap on a historical year basis, with 1990 as our preferred reference year. Our final determination on this matter will await further consideration of implementation issues associated with using this particular year as the reference, including the availability of adequate historical emissions data for the investor-owned utilities (IOUs) and other LSEs. We also leave to the implementation phase our consideration of the appropriate level of emissions reductions (and associated caps) over time, relative to the base year.

We intend to create a load-based GHG emissions cap that is compatible with any other GHG cap-and-trade regime that may be developed in the future, either in the Western Region, nationally, or internationally. Therefore, the GHG emissions allowances associated with our load-based cap will be in the form of "tons of carbon-dioxide equivalent." Based on the record in this proceeding, our preference is to administratively allocate these allowances, rather than auction them. At least initially, we intend to limit the use of offsets to actions directly related to utility activities (e.g., diesel pump electrification) and to activities occurring within California. We may consider a broader use of offsets in the future after measurement and verification protocols for national and/or international mechanisms are better developed.

For the reasons discussed in this decision, we will limit the trading of offsets. Because we wish to encourage early action on GHG emissions reductions, we are not inclined to allow borrowing of allowances (from future year allocations) during the initial stages of implementation. We intend, however, to allow some banking of emissions allowances for a period of three years. We conclude that some form of penalty structure for non-compliance is necessary, or else the GHG reduction requirements will only be voluntary. At this juncture, we prefer structuring penalties as alternative compliance payments, but will further explore the nature of an appropriate penalty mechanism during the implementation phase.

In conjunction with a load-based emissions cap on electric procurement, we will pursue the development of shareholder incentives in resource-specific proceedings, with our immediate focus on energy efficiency. As discussed in this decision, we will also explore the concept of allowance sale incentives during the implementation phase. Under this mechanism, the Commission would certify GHG emission allowances based on superior performance, as defined by the Commission, for sale by the utilities outside of California to the benefit of their shareholders.

We delegate to the Assigned Commissioner and Administrative Law Judge (ALJ) the scoping of the implementation steps necessary to implement our policy decision today for adoption in a future decision in this proceeding or a successor proceeding. Those implementation steps include, but are not limited to: (1) quantifying the GHG emissions baseline for each LSE, (2) adjusting GHG emission reduction requirements over time, relative to the baseline, (3) adopting and administering a process for allocating emissions allowances, and (4) developing flexible compliance mechanisms with appropriate performance penalties.

In the meantime, we require LSEs, when they file their 2006 procurement plans, to include information about existing GHG emissions profiles and the future GHG emissions implications of their procurement plans.

We also direct PG&E, SDG&E, and SCE to include a provision in any power purchase agreement for non-renewable energy that requires the supplier to register and report their GHG emissions with the California Climate Action Registry (CCAR). CCAR is a non-profit public/private partnership that serves as a voluntary GHG registry of participating companies' emission profiles. Participating power generators and electric utilities account for and report GHG emission inventories according to the CCAR's reporting protocols. PG&E, SCE, and SDG&E are already voluntary members of CCAR.

As discussed in this decision, we fully intend to continue to collaborate with Governor Schwarzenegger's Climate Action Team and to coordinate today's adopted policies with the administration's GHG reduction policies and goals. In particular, we will continue to work with the Governor's Climate Action Team to ensure that municipal utilities are also subject to a GHG emissions reduction regime that will assist California in meeting the aggressive GHG reduction goals articulated in Executive Order S-3-05.

We also note that, with this decision, we are joining in the pioneering efforts on greenhouse gas regulation started in the Northeast and Mid-Atlantic states with the voluntary Regional Greenhouse Gas Initiative there. We hope that these parallel but distinct efforts on both coasts will help move the ball forward on initiatives to reduce greenhouse gas emissions and mitigate global climate change in the United States and around the world.

¹ Attachment 1 describes the abbreviations and acronyms used in this decision.