2. Background

The original Energy Action Plan (EAP) adopted in 2003 articulates the commitment of the California Public Utilities Commission (CPUC or Commission) and the California Energy Commission (CEC) to, among other things, "minimizing the energy sector's impact on climate change." In the EAP, the CPUC and the CEC committed to decreasing per capita energy use and reducing toxic emissions and gases through increased conservation, efficiency, and renewable resources. The EAP established a "loading order" of energy resources, with energy efficiency and conservation first, followed by demand response, renewable generation, distributed generation, and then other conventional generation and transmission investments.

In the Order Instituting Rulemaking (R.) for this proceeding,2 the Commission presented a staff proposal that would translate these commitments into a cap-and-trade procurement incentive framework (referred to as the Sky Trust proposal).

In its description of the Sky Trust proposal, staff noted that a cap-and-trade framework does not necessarily obviate the need to consider additional financial earnings/penalty incentive mechanisms tied to IOU procurement performance. Although a detailed consideration of financial incentives was beyond the scope of the Sky Trust paper, staff suggested that "the utility's overall performance in energy procurement could be evaluated based on achieving the targets established for specific types of preferred resources (e.g., energy efficiency and renewable resources) as well as on performance targets established for long-term portfolio costs."3

In Decision (D.) 04-12-048, the Commission discussed expectations regarding the development of a GHG reduction policy:

"In a separate phase of this proceeding, we will be evaluating a procurement incentive framework modeled after the cap-and-trade principles of the Sky Trust. [Footnote omitted.] Under that proposed framework, the Commission would establish annual limits on carbon-based energy procurement as a means to meet the Commission's EAP goals and minimize utility contribution to climate change. We will address the effectiveness of this proposal, as well as other approaches to "carbon caps" on utility procurement, to minimize utility contribution to climate change, in subsequent decisions in this rulemaking or other appropriate proceedings. For this purpose the Assigned ALJ and/or Assigned Commissioner may direct Commission staff to perform additional analysis or studies, as needed. We intend to put in place a procurement incentive framework after considering the cap-and-trade Sky Trust proposal as well as other approaches (e.g., specific carbon emission limits) by the end of 2006, or as soon as practicable."4

On February 23, 2005, the Commission convened an en banc meeting to discuss best practices for reducing GHG emissions and to encourage the Commission-regulated entities to think "beyond procurement." A paper prepared by the CPUC Division of Strategic Planning for that meeting, "Climate Change and the California Public Utilities Commission's Role," discusses in detail the "opportunity to make a significant contribution to emissions reductions statewide and nationally."5

On March 7-9, 2005, the CPUC convened a three-day workshop in this proceeding to consider the potential interactions between strategies for GHG reduction and financial incentives for procurement performance that would apply to the four major IOUs. To help focus party preparation for these workshops, the assigned ALJ circulated the staff's Sky Trust proposal and directed interested parties to file pre-workshop comments on the staff proposal and to submit alternate procurement incentive frameworks for Commission consideration. Approximately 50 individuals, representing 25 different stakeholders, attended one or more days of the workshops.

On March 29, 2005, staff issued a workshop report detailing the contents of these workshops.6 The workshop report contains details of the workshop participants, issues discussed at the workshops, and also includes attachments of parties' pre-workshop proposals and comments. On April 4, 2005, the assigned ALJ issued a ruling providing for parties' comments and reply comments on the workshop report. Comments were filed on May 2, 2005, with reply comments on May 23, 2005. As directed in the April 4 ruling, each energy service provider listed in Appendix A of D.05-03-013 and the service list in this proceeding, R.04-01-025 and R.03-10-003 was served a copy of the ruling and comments.

The following parties filed opening comments on the workshop report: Cogeneration Association of California (CAC) and Energy Producers and Users Coalition (EPUC) (jointly), Duke Energy North America (Duke), Green Power Institute (GPI), Natural Resources Defense Council (NRDC), Division of Ratepayer Advocates (DRA),7 PG&E, SDG&E, Sempra Global (Sempra), Solargenix, SCE, The Utility Reform Network (TURN), and the Union of Concerned Scientists (UCS). Reply comments were filed by GPI, NRDC, PG&E, SCE, UCS, and TURN.8

On June 1, 2005, subsequent to the events in this proceeding, Governor Schwarzenegger announced his statewide GHG reduction targets in Executive Order S-3-05. Those targets provide for the following reductions in GHG emissions: reduction to 2000 emissions levels by 2010, reduction to 1990 levels by 2020, and reduction to 80% below 1990 levels by 2050.

Executive Order S-3-05 also calls for the California Environmental Protection Agency (CalEPA) to lead a multi-agency effort to conduct an analysis of the impacts of climate change on California and to develop strategies to achieve the targets and mitigation/adaptation plans for the state. This effort is now being referred to as the Climate Action Team. Strategies identified and under consideration by the Climate Action Team include significant anticipated reductions in GHG emissions from the electric sector.

In addition, in September and October 2005, both the CEC and the CPUC, respectively, adopted the EAP II. This updated plan includes several key actions specific to reducing GHG emissions, such as:

· Reporting to the Governor on the findings of the Climate Action Team subgroup on electric sector strategies for the state;

· Considering 2010, 2020, and 2050 GHG reduction targets for retail sellers of electricity to contribute to the Governor's GHG emission reduction targets;

· Coordinating with the Climate Action Team on this proceeding's consideration of establishing a cap for IOUs;

· Ensuring that energy supplies serving California, from any source, are consistent with the Governor's climate change goals;

· Identifying Western State policies and strategies to achieve production of 30,000 MW of clean energy across the West by 2015, consistent with the Western Governors' Association Clear and Diversified Energy Committee and West Coast Climate Initiative goals; and

· Identifying methodologies to quantify the expected costs and benefits of climate change policies.

On October 6, 2005, the Commission issued a Policy Statement on Greenhouse Gas Performance Standards (GHG Policy Statement) announcing that "there are approximately 30 proposed coal-fired plants across the West, some of which are planned in anticipation of meeting demand in California. The carbon dioxide emissions from just three 500 MW conventional coal-fired power plants would offset all of the emissions reductions from the IOUs' energy efficiency programs and would seriously compromise the State's ability to meet the Governor's GHG goals. As the largest electricity consumer in the region, California has an obligation to provide clear guidance on performance standards for utility procurement."9 To address this concern, the Commission stated its intent to investigate the integration of GHG emissions standards into its procurement policies.

2 See Order Instituting Rulemaking R.04-04-003 adopted April 1, 2004.

3 See Administrative Law Judge's Ruling Scheduling Workshops on Procurement Incentive Framework, November 23, 2004 (R.04-04-003), Appendix B, p. 14.

4 D.04-12-048, mimeo., p. 155.

5 CPUC Division of Strategic Planning, "Climate Change and the California Public Utilities Commission's Role," February 23, 2005, p. 6.

6 See Procurement Incentive Framework, R.04-04-003, Workshop Report, March 7-9, 2005, prepared by Commission Workshop staff, March 29, 2005 (Workshop Report). This document can be viewed on the Commission's Website at: www.cpuc.ca.gov/static/hottopics/1energy/r0404003.htm.

7 Effective January 1, 2006 per California Public Utilities Code (Pub. Util. Code), Section 309.50, the CPUC's Office of Ratepayer Advocates became the Division of Ratepayer Advocates. We use this new name throughout today's decision, even for comments were filed under the previous name.

8 Californians For Renewable Energy Inc. filed reply comments in this phase of the proceeding without obtaining intervenor (party) status, and therefore those comments are not considered in today's decision. See ALJ ruling dated March 28, 2005.

9 GHG Policy Statement, p. 2. This can be viewed at: http://www.cpuc.ca.gov/PUBLISHED/REPORT/50432.htm.

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