2. Background
In the Order Instituting Rulemaking (OIR) initiating Rulemaking (R.) 06-04-009, the Public Utilities Commission provided that Phase 2 would be used to implement a load-based GHG emissions cap for electricity utilities, as adopted in Decision (D.) 06-02-032 as part of the procurement incentive framework, and also would be used to take steps to incorporate GHG emissions associated with customers' direct use of natural gas into the procurement incentive framework.3
On September 27, 2006, Governor Schwarzenegger signed into law AB 32, "The California Global Warming Solutions Act of 2006." This legislation requires ARB to adopt a GHG emissions cap on all major sources in California, including the electricity and natural gas sectors, to reduce statewide emissions of GHGs to 1990 levels.
We held a prehearing conference (PHC) in Phase 2 on November 28, 2006. The Phase 2 scoping memo, which was issued on February 2, 2007, determined that, with enactment of AB 32, the emphasis in Phase 2 should shift to support implementation of the new statute. Because of the need for "a single, unified set of rules for a GHG cap and a single market for GHG emissions credits in California," the Phase 2 scoping memo provided that "Phase 2 should focus on development of general guidelines for a load-based emissions cap that could be applied ... to all electricity sector entities that serve end-use customers in California,"4 including both investor-owned utilities (IOUs) that the Public Utilities Commission regulates and publicly owned utilities (POUs).
As detailed in the Phase 2 scoping memo, the Public Utilities Commission and Energy Commission are undertaking Phase 2 on a collaborative basis, through R.06-04-009 and Docket 07-OIIP-01, respectively, to develop joint recommendations to ARB regarding GHG regulatory policies as it implements AB 32.
The Phase 2 scoping memo noted that the policies in D.06-02-032 were adopted prior to passage of AB 32. It placed parties on notice that, in the course of Phase 2, the Public Utilities Commission might adopt policies that would modify portions of D.06-02-032 as a result of AB 32, subsequent actions by ARB, or the record developed in the course of this proceeding.5
In D.06-02-032, the Public Utilities Commission stated an intent to apply a load-based GHG emissions cap to the three major IOUs, and also to Community Choice Aggregators (CCAs) and Electric Service Providers (ESPs) operating within the service territory of the three major IOUs. In D.06-10-020 amending the OIR, the Public Utilities Commission specified that, with the passage of Senate Bill (SB) 1368, all ESPs, all CCAs, and all electrical corporations, including all IOUs, multi-jurisdictional utilities, and electric cooperatives, are respondents to this rulemaking. The Phase 2 scoping memo specified that Phase 2 would address whether the load-based GHG emissions cap should apply to the additional respondents added by D.06-10-020.
On April 19, 2007, the Public Utilities Commission and the Energy Commission held a symposium which addressed linking GHG cap-and-trade systems. Reporting issues were also discussed.
As Phase 2 has progressed, the Public Utilities Commission has modified the scope of Phase 2 through D.07-05-059 and D.07-07-018 amending the OIR.6 D.07-05-059 specified that Phase 2 should be used to develop guidelines for a load-based GHG emissions cap for the entire electricity sector and recommendations to ARB regarding a statewide GHG emissions limit as it pertains to the electricity and natural gas sectors. To that end, D.07-05-059 also expanded the natural gas inquiry in Phase 2 to address GHG emissions associated with the transmission, storage, and distribution of natural gas in California, in addition to the use of natural gas by non-electricity generator end-use customers as originally contemplated in the OIR. The list of respondents to this proceeding was amended to include all investor-owned gas utilities, including those that provide wholesale or retail sales, distribution, transmission, and/or storage of natural gas.
D.07-07-018 amended the OIR further to provide for consideration in Phase 2 of issues raised by and alternatives considered in the June 30, 2007 Market Advisory Committee report entitled, "Recommendations for Designing a Greenhouse Gas Cap-and-Trade System for California," to the extent that they were not already within the scope of Phase 2. Thus, D.07-07-018 provided for consideration of alternatives to a load-based cap for the electricity sector, a deviation from the policies adopted in D.06-02-032. In that report to ARB, the Market Advisory Committee considered design of a market-based program to reduce GHG emissions, and described various options for the scope of a cap-and-trade program. For the electricity sector, the Market Advisory Committee recommended a "first seller" approach, with the entity that first sells electricity in the state responsible for meeting the compliance obligation. As discussed in this decision, we are now focusing on a variation on this approach, the "deliverer" approach.
By Administrative Law Judge's (ALJ) rulings, parties were asked to submit comments and legal briefs on issues raised by the Market Advisory Committee report. On August 21, 2007, the Public Utilities Commission and the Energy Commission held a joint en banc hearing addressing the type and point of GHG regulation in the electricity sector, including deliverer/first seller and load-based cap-and-trade approaches. In an ALJ ruling issued on November 9, 2007, parties were provided an opportunity to file additional comments on issues regarding the type and point of regulation for the electricity sector.
By ALJ ruling dated July 12, 2007, parties were asked to file comments on preliminary recommendations of the Public Utilities Commission staff regarding the regulatory treatment of GHG emissions in the natural gas sector. The staff paper attached to the ALJ ruling identified and discussed various policy issues associated with developing regulations to control GHG emissions in the natural gas sector. A prehearing conference was held on August 2, 2007 to address the manner in which regulation of GHG emissions in the natural gas sector should be considered in this proceeding. By ALJ ruling dated November 28, 2007, parties were asked to file comments on the approach to GHG regulation that would be appropriate for the natural gas sector.
ARB is taking the lead on developing reporting protocols and requirements for all entities covered by AB 32, including the electricity and natural gas sectors. In D.07-09-017 and a companion Energy Commission decision, the Public Utilities Commission and the Energy Commission recommended that ARB adopt proposed regulations contained in that decision as reporting and verification requirements applicable to retail providers and marketers in the electricity sector. The reporting requirements for the electricity sector approved by ARB on December 6, 2007 are consistent with the proposed regulations recommended by the two Commissions. ARB has indicated that protocols for some sectors, including the natural gas sector, will be issued later. While staff will continue to coordinate closely with ARB on development of reporting requirements, we do not plan to develop recommendations on reporting requirements for the natural gas sector unless reporting issues arise that are unique to the sector.
The scoping memo specified that Phase 2 would address the appropriate 1990 emissions baseline for the entire electricity sector. ARB adopted statewide 1990 GHG emissions levels on December 6, 2007. No concerns related to 1990 emissions in the electricity and natural gas sectors have been identified in this proceeding to warrant development of recommendations by the two Commissions to ARB. As a result, we have not developed recommendations regarding the 1990 GHG emissions baseline.
Phase 2 is also addressing how to distribute annual emissions allowances under a cap-and-trade mechanism to individual entities, to the extent appropriate, and how such a process should be administered. An October 15, 2007 ALJ ruling requested comments on allowance allocation issues, and a workshop was held on this topic on November 5, 2007.
As part of our Phase 2 analysis, the Public Utilities Commission hired a consultant to conduct detailed modeling of the electricity sector impacts of potential GHG emissions cap scenarios. The modeling analysis is to take into account the policy options developed in other portions of the proceeding in order to analyze various options for cap design and implementation for the electricity sector. The consultants are also considering the natural gas sector in their modeling process. However, separate, detailed modeling of the natural gas sector is not being undertaken. The modeling effort is examining the level and costs of emission reductions that can be achieved by the electricity and natural gas sectors before the 2020 deadline set by AB 32. It is also addressing the rate at which these types of reductions can be achieved, which will inform our recommendations for annual emissions goals for the electricity and natural gas sectors. A November 9, 2007 ALJ ruling requested comments on modeling-related issues and on a staff paper on emission reduction measures. A workshop on input assumptions and initial model results was held on November 14, 2007.
3 In D.07-01-039 in Phase 1 of this proceeding, the Public Utilities Commission adopted a GHG emissions performance standard for new long-term financial commitments to baseload electricity generation. D.07-05-063 denied applications for rehearing of D.07-01-039. D.07-08-009 denied a petition for modification, but clarified how the adopted cogeneration thermal credit methodology will be applied to bottoming-cycle cogeneration. On February 12, 2008, SCE filed an amended Petition to Modify D.07-01-039, which is pending.
4 Phase 2 scoping memo, mimeo. at 8.
5 Id., mimeo. at 10-11.
6 On December 20, 2007, the Assigned Commissioner issued a ruling modifying the Phase 2 scoping memo to specify the manner in which natural gas issues raised in the OIR and the issues added by D.07-05-059 and D.07-07-018 would be considered in Phase 2.
