V. Methods of RPS Compliance for ESPs and CCAs

A. Procurement Entities

TURN recommends the use of procurement entities, which would enter into long-term contracts on behalf of those ESPs that are unable to meet long-term resource commitments. (TURN Opening Brief, pp. 6-8.)⁹ PG&E and SCE, while they express some concerns about how such an arrangement would work (and oppose being required to act as procurement entities), note that in some circumstances such an arrangement may make sense. (PG&E Reply Brief, pp. 9-10; SCE Reply Brief, pp. 5-8.) PG&E supports the participation of third party intermediaries to provide credit enhancement to non-investment grade ESPs. (PG&E Reply Brief, p. 10.) We endorse the concept of using procurement entities or other intermediaries to facilitate the successful participation of ESPs and CCAs in the RPS program, provided that the individual ESPs and CCAs remain responsible and accountable for RPS compliance. At this point, we believe it may be appropriate to allow the utilities to act as procurement entities for ESPs and CCAs, but we will not require them to do so. The subsequent decision(s) implementing ESP, CCA, and small and multi-jurisdictional utility participation in the RPS program will further clarify the nature and role of the procurement entities or other intermediaries.

B. Renewable Energy Credits

This leaves us with one more complex issue to address: the ability of entities subject to the RPS requirements to utilize renewable energy credits (RECs) in meeting their RPS compliance requirements. In February of this year, parties submitted extensive comments and reply comments addressing the Commission's ability and the advisability of authorizing the use of RECs, either unbundled or tradeable, for RPS compliance purposes.

In this decision, we utilize these comments to inform and articulate our preferences for further exploration of these policy issues. We do not, at this time, make any changes to the current rules governing participation in RPS. We will address more detailed implementation issues in a subsequent decision, and will rely on the Assigned Commissioner and Assigned ALJ to set a framework and schedule for addressing further implementation issues associated with RECs, either unbundled or tradeable. To facilitate this, we expect that the Assigned ALJ will schedule a prehearing conference as soon as possible after the adoption of this decision.

We understand that some parties question the legal basis for our authority in this area. TURN is the main party that argues that the Commission has no authority to allow the use of either unbundled or tradeable RECs for compliance with RPS without changes in law.¹⁰ UCS and Green Power seem to agree in part, but UCS goes on to suggest ways that the Commission can phase in unbundled RECs. SCE, in its comments, believes that our authority is questionable, but TURN is the party that argues most strenuously that the definition of RPS contained in SB1078 prohibits unbundled REC trading. The language in SB1078 states:

"'Renewables portfolio standard' means the specified percentage of electricity generated by eligible renewable energy resources that a retail seller is required to procure pursuant to Sections 399.13 and 399.15."¹¹

TURN's primary analysis is based on the use of the word "electricity" in the section cited above, arguing, based on the plain language, that it prohibits the use of RECs to satisfy this requirement. We disagree. We believe this definition was meant as general definitional guidance and not as a prohibition on the use of RECs. There are numerous places in SB 1078, including Section 399.15 to which the above definition refers, where the code refers to "procurement of eligible renewable energy resources." Thus, the term "electricity" is not consistently used throughout the statute.

TURN goes on to consider a great deal of legislative history surrounding the treatment of RECs. In particular SB 532 (Sher)¹² that was considered prior to the adoption of SB1078 would have created a REC-based RPS program. In addition, SB1478 (Sher)¹³ from the 2003-2004 Legislative session, which was vetoed by the Governor, would have made explicit changes to the code that would have allowed the Commission to consider creating a REC trading system. TURN argues that these bills show that without additional legislation, the Commission does not have the authority to allow RECs as a compliance mechanism for RPS now.

We note, however, that in an analogous manner, SB 107 (Simitian and Perata) from the most recent legislative session, at one point contained a provision that would prohibit the use of RECs to satisfy RPS requirements. Logically, the Legislature would not have considered it necessary to prohibit RECs for compliance with RPS if the Commission did not already have the authority to establish this compliance mechanism.

Therefore, given all of this complex history, we conclude that the Legislature has, at times, contemplated further articulating its preferences for how an unbundled REC framework should develop in California. Should the Legislature do so, we would be bound by any requirements in the code. But in the meantime, we conclude that further investigation of this issue by the Commission is not prohibited by current law.

Therefore, we intend to have further proceedings on the subject of how unbundled RECs might be used for RPS compliance, as well as how we might eventually provide for the ability of entities subject to the RPS to trade RECs. It is our hope that this exploration will inform future Legislative and regulatory work on these subjects.

CEERT's position, which is echoed by many others, is that REC components of a renewable energy power sale can be disaggregated from the underlying energy and sold by an "eligible renewable energy resource" to a "retail seller" as both are defined by SB 1078. CEERT argues that this can be used as a means of achieving flexible compliance with RPS requirements. We agree. As CEERT notes, more than two years ago, an ALJ ruling in R.01-10-024 (RPS phase) identified RECs as having a role in the "flexible compliance mechanisms" outlined by SB 1078 and we held, jointly with the CEC, workshops on the issue. In addition, RECs were acknowledged as the means to account for RPS compliance in D.03-06-071 and a definition of RECs and contractual language was adopted among RPS standard terms in D.04-06-014.

In this way, the Commission set the stage for the potential unbundling of RECs from their underlying energy. In this decision, we state affirmatively that we wish to explore the possibility of allowing unbundled RECs to count in the future toward RPS compliance to support timely RPS compliance by all retail sellers, including the utilities, ESPs, CCAs, and small and multi-jurisdictional utilities. Subsequent to this decision, the Assigned Commissioner and Assigned ALJ may issue rulings to set the scope and schedule for further investigation into the implementation of an unbundled REC framework for RPS compliance.

We decline to initiate the use of unbundled RECs for RPS compliance immediately because there are still a number of implementation questions and issues that must be resolved. Thus, this decision simply affirms our preference for moving forward with exploration of this issue for the reasons discussed below, but we will decide in a subsequent decision if, when, and how RECs may be unbundled for RPS compliance purposes.

As pointed out by IEP and AReM, allowing unbundling of RECs may provide multiple advantages. RECs may allow RPS compliance without a need for as much emphasis on local or regional transmission congestion. RECs will allow project developers to sell output to multiple small buyers, such as small ESPs, CCAs, or utilities, where particular project sizes do not exactly match the needs of the buyer. In addition, because the renewable potential in California is not equally distributed geographically, RECs will facilitate RPS compliance regardless of load location.

All of these are good reasons for exploring the unbundling of RECs. We note, however, that, even if we authorize their use, we view unbundled RECs as an additional tool for flexible compliance with RPS requirements. We believe RECs can reasonably be used to supplement RPS procurement by entities subject to the RPS requirements. We do not believe that it would be prudent for entities to rely solely on the purchase of unbundled RECs to satisfy their RPS requirements. It is not our intent to explore the use of unbundled REC purchases to supplant the long-term investment in renewable generation resources by entities required to comply with the RPS.

Several parties including UCS, IEP, AReM, PG&E, and others, in their comments, also raised the fundamental policy issue of whether supplemental energy payments (SEPs) can or should be allowed to be used to purchase unbundled RECs for RPS compliance. AReM argues that SEPs should be allowed to be used for unbundled REC purchases, so as not to discriminate among types of renewable purchases eligible for RPS compliance (assuming that unbundled RECs are eligible for compliance). AReM argues that SEPs are a reasonable proxy for the above-market costs of RECs when RECs are unbundled from the underlying electricity.¹⁴ PG&E appears to agree.

UCS, on the other hand, makes the most persuasive case that SEPs should not be allowed to fund purchases of RECs. In particular, UCS argues that the purpose of SEPs is to support long-term investments in new in-state renewable energy resources. RECs, they say, cannot be easily translated into above-market costs of renewables, because it is conceivable that some delivered energy purchases from RPS facilities may cost less than the market price referent, and yet still come with associated RECs.

At this point, on a policy basis, we preliminarily agree with UCS. It is not clear to us how SEPs could appropriately be used to support the purchase of RECs without the underlying electricity. We will ask for further information on this subject from parties subsequent to this decision.

So far we have only discussed using unbundled RECs for RPS compliance purposes, and not for secondary trading among entities required to comply with the RPS. As several parties have argued, including PG&E, CEERT, IEP and UCS, a tool for tracking RECs will soon be available, in the form of the Western Renewable Energy Generation Inventory System (WREGIS), being developed by the CEC. We believe that such a tracking mechanism should be a precursor to the trading of RECs, since adequate tracking and monitoring is necessary in order to facilitate a robust and fair trading market. We do not intend to preclude, however, the possibility of developing an interim mechanism for certifying and tracking RECs, prior to the rollout of WREGIS, if such an interim mechanism can be developed in the course of our exploration of these issues.

In this decision we state that we would only consider authorizing fully tradeable RECs in the future, after further exploration, after WREGIS, or another viable tracking mechanism, is completed in the future. As stated in D.03-06-071, we remain concerned about the potential for manipulation of the renewable market through the trading of RECs, and will need to be assured that any potential tradeable REC market has appropriate safeguards in place. We also remind parties that our other concerns expressed in D.03-06-071 about the advisability of allowing tradeable RECs must be satisfied if we are to move forward with a tradeable REC framework in the future. With this guidance, the Assigned Commissioner and ALJ can proceed to frame our future proceedings and exploration of these issues.

C. Short-Term Contracting

We are aware that, in the context of the Legislative debate on SB 107 from this year, a proposal was discussed that would allow ESPs and CCAs to use shorter-term contracts (less than the ten years presumptively prescribed in the RPS statute¹⁵) to comply with their RPS targets. We expect to entertain this option in our further proceedings on the subject of CCA, ESP, and small and multi-jurisdictional utility participation in the RPS program, and will ask for parties' comments on whether and how the use of this type of short-term contracting authority should or should not be allowed for RPS compliance purposes. We do not intend, however, to entertain this option for large utility compliance with RPS requirements. This is consistent with our discussion in section II above, where we articulate our policy reasons for differentiating the manner in which entities comply with RPS requirements, depending on their particular characteristics such as level of regulatory oversight, level of competition affecting their business, and accountability.

⁹ Green Power generally supports the concept of using of procurement entities.

¹⁰ By "unbundled" RECs, we mean a single transaction from the original renewable resource to a single buyer who does not necessarily acquire the associated energy. By "tradeable" RECs, we mean RECs that can be traded among multiple buyers and sellers on a secondary market.

¹¹ Public Utilities Code Section 399.12(c).

¹² SB 532 (Sher), 2001-2002 legislative session.

¹³ SB 1478 (Sher), 2003-2004 legislative session.

¹⁴ See AReM, Phase II Opening Brief, January 18, 2005, p. 11.

¹⁵ Section 399.14 (a)(4) provides that "...each electrical corporation shall offer contracts of no less than 10 years in duration, unless the commission approves of a contract of shorter duration." There is no reason our discretion to approve shorter contracts would not also apply to ESPs and CCAs.