COM/MP1/tcg Date of Issuance 3/14/2008
Decision 08-03-018 March 13, 2008
BEFORE THE PUBLIC UTILITIES COMMISSION OF THE STATE OF CALIFORNIA
Order Instituting Rulemaking to Implement the Commission's Procurement Incentive Framework and to Examine the Integration of Greenhouse Gas Emissions Standards into Procurement Policies. |
Rulemaking 06-04-009 (Filed April 13, 2006) |
INTERIM OPINION ON GREENHOUSE GAS REGULATORY STRATEGIES
INTERIM OPINION ON GREENHOUSE GAS REGULATORY STRATEGIES 1
1. Summary 2
2. Background 12
3. GHG Policies for the Electricity Sector 18
3.1. Overview of Approaches Considered 19
3.2. Types of GHG Regulation 20
3.3. Point of GHG Regulation in a Cap-and-Trade System 40
3.3.1. Positions of the Parties 42
3.3.1.1. Retail Providers as the Point of Regulation 42
3.3.1.2. In-State Generators as the Point of Regulation,
Imports not in Cap-and-Trade 49
3.3.1.3. Deliverers as the Point of Regulation 52
3.3.1.4. In-State Generators, Retail Providers for Imports
as Point of Regulation 58
3.3.2. Discussion 59
3.3.2.1. Environmental Integrity and Real GHG Emissions Reductions 61
3.3.2.2. Compatibility With/Expandability to Potential Regional and/or National Cap-and-Trade Markets 63
3.3.2.3. Accuracy and Ease of Reporting, Tracking, and
Verifying Emissions Reductions 66
3.3.2.4. Compatibility with Wholesale and Retail Energy
Market Reforms 67
3.3.2.5. Conclusions Regarding Compatibility with the
First Four Criteria 72
3.3.2.6. Formulation of the Deliverer Point of Regulation 72
3.3.2.7. Legal Issues Related to Deliverer Point of Regulation 81
3.3.2.8. Conclusion 91
3.4. Allowance Distribution in a Cap-and-Trade System with
Deliverer Point of Regulation 91
4. GHG Policies for the Natural Gas Sector 101
4.1. Overview of Approaches Considered 101
4.2. Scope of the Natural Gas Sector 102
4.3. Types of GHG Regulation 113
4.3.1. Position of the Parties 113
4.3.1.1. Increased Reliance on Direct Emission Reduction
Measures 113
4.3.1.2. Cap-and-Trade System 116
4.3.2. Discussion 119
4.4. Distribution of Allowances in a Cap-and-Trade System 123
5. Comments on Proposed Decision 124
6. Assignment of Proceeding 124
Findings of Fact 124
Conclusions of Law 131
INTERIM ORDER 134
ATTACHMENT A
INTERIM OPINION ON GREENHOUSE GAS REGULATORY STRATEGIES
1. Summary
The California Public Utilities Commission (Public Utilities Commission) and the California Energy Commission (Energy Commission) recommend that the California Air Resources Board (ARB) adopt a number of policies and requirements for greenhouse gas (GHG) emissions reductions from the electricity and natural gas sectors in California. These recommendations should be adopted as part of ARB's scoping plan for its further work in implementing Assembly Bill (AB) 32, which requires that statewide GHG emissions be reduced to 1990 levels by 2020.1
In particular, we recommend that ARB adopt a mix of direct mandatory/regulatory requirements for the electricity and natural gas sectors and a cap-and-trade system that includes the electricity sector. We recognize that, under AB 32, ARB has the ultimate responsibility to determine the appropriate design and mix of mandatory and market-based programs to reduce GHG emissions, as prescribed in the law. We also recognize that, prior to adopting any market mechanisms, ARB must find that such mechanisms meet the tests outlined in Part 4 and Part 5 of AB 32.2 Our task in this decision is to give ARB our best formulation of approaches to the electricity and natural gas sectors so that they may be evaluated along with other options for regulating California GHG emissions. We expect that ARB will fulfill the requirements of Part 4 and Part 5 of AB 32 with our advice and recommendations in mind.
Our recommendations are summarized in more detail below. We also recommend that implementation of all aspects of our recommendations to ARB regarding mechanisms to ensure real GHG reductions in the electricity and natural gas sectors should be regularly monitored and enforced, with mechanisms built in for monitoring, rapid identification of problems, and tools to react to, correct, or penalize non-compliance.
In addition, we continue our commitment to work in collaboration with other states and provinces in the Western Climate Initiative to design a cap-and-trade system for the West. The timeframe set for the Western Climate Initiative to agree on a design framework and principles is quite similar to ARB's AB 32 timeframe. Thus, we are confident that we can develop our California policies to be compatible with a regional cap-and-trade system and in cooperation with our partners in the Western Climate Initiative.
1.1. Electricity Sector
The Energy Action Plan includes a "loading order" for investment in electricity resources that puts energy efficiency as the top priority, followed by renewable energy investment. These are also the priorities and best available approaches to drive GHG reductions in California's electricity sector. Therefore, we recommend that all retail providers in California, regardless of regulatory structure or status, be required to deliver these resources to consumers.
For energy efficiency, we recommend that ARB set its scoping plan requirements at the level of all cost-effective energy efficiency in the State. This would be achieved through a combination of utility and non-utility programs coordinated at the State level, with consistent requirements across all types of retail providers. In addition, energy efficiency should be defined broadly to include any programmatic approach that reduces on-site usage of electricity. For electricity from renewable energy, we recommend that the requirements go beyond the current 20% requirement, consistent with State policy, but leave open consideration of exact percentage requirements or deadlines, pending further analysis. We recognize that the agencies may need to seek Legislative authority to achieve some of these objectives. Fundamentally, the energy efficiency and renewable energy programs provide a base of GHG reductions that are permanent and continuous through 2020. We expect these regulations to continue to be enhanced over the AB 32 period.
Beyond this, we recommend that a multi-sector cap-and-trade program be developed for California that includes the electricity sector, provided that ARB finds that the tests outlined in Part 4 and Part 5 of AB 32 are met. 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. A number of policy reasons underlie our recommendation to design a cap-and-trade program now:
· A cap-and-trade program is likely to produce additional real GHG emissions reductions beyond the mandatory programs described above, from a wider variety of sources and at a lower cost than requiring reductions only from additional mandatory measures.
· It would achieve reductions in the least-cost manner by allowing for flexibility in achieving emissions targets through allowing obligated entities to rely on the least-cost abatement options across the entire economy.
· It would encourage investment in research and innovation in technologies that lower GHG emissions by providing a larger market in which new technologies could be introduced.
· It would allow market participants to manage risk.
· It would efficiently distribute the cost of GHG reductions across all capped entities, so that total costs of achieving emission targets are minimized.
· AB 32 establishes an aggressive timetable for implementing reductions in California that persuades us to proceed now to design how the electricity sector could participate in a multi-sector cap-and-trade program, which ARB may choose to pursue if it finds that the tests outlined in Part 4 and Part 5 of AB 32 are met.
In order to obtain real GHG emissions reductions, the design of an effective cap-and-trade program in the electricity sector must address the emissions associated with California's imported power. This is because, while California imports approximately 20% of its electricity from neighboring states, those imports represent more than 50% of the GHG emissions from the sector. Therefore, we conclude that any cap-and-trade program design for California must include an import component.
For the point of regulation in the electricity sector, we recommend that ARB designate deliverers of electricity to the California grid, regardless of where the electricity is generated, as the entities responsible for compliance with the AB 32 requirements. This is a variation of the first seller approach recommended by the Market Advisory Committee. In arriving at this conclusion, we evaluated four options against a set of criteria. The four options are:
· Deliverers (a variation of first sellers),
· Retail providers (also referred to as load-based),
· In-state generators, with no inclusion of imports in the cap-and-trade system, and
· In-state generators, with retail providers as the point of regulation for imports (often referred to as a hybrid option).
We assume that as a threshold matter, all options would have to be consistent with other federal, State, and local environmental requirements, such as those pertaining to criteria pollutants and toxic waste. The four options identified above were evaluated using the following criteria:
· Environmental integrity (i.e., ability to produce real GHG emissions reductions),
· Compatibility with/expandability to potential regional and/or national GHG emissions cap-and-trade markets,
· Accuracy and ease of reporting, tracking, and verifying GHG emissions reductions,
· Compatibility with ongoing reforms in wholesale and retail energy markets, and
· Legal issues.
After evaluating the point of regulation options, we find that the deliverer option best meets the first four criteria listed above. Each of the other options has serious shortcomings regarding one or more of our priorities. The deliverer system provides for obtaining real GHG emissions reductions by covering imported power as well as in-state generation. It also shares a number of common characteristics with a pure generation-based point of regulation, making it likely to be compatible with the eventual design of a cap-and-trade system that is broader in geographic scope (regional and/or national). The deliverer point of regulation also improves the ability to report and track emissions in the sector, which in turn helps provide real GHG reductions. It also minimizes the impact of AB 32 GHG regulations on California's wholesale electricity markets. In addition, it is consistent with the existing methods for regulating criteria pollutants and toxic waste.
Finally, the deliverer method can be supported on legal grounds. For all of these reasons, we recommend deliverers as the point of regulation for a GHG cap-and-trade program as it applies to the electricity sector.
We also address certain policy questions regarding the allocation of GHG emission allowances in a deliverer-based point of regulation system. Fundamentally, determining the point of regulation is independent from determining the method of obtaining allowances or the method of distributing any benefits which might come from allocation. Allocation issues will be addressed in more detail in the next portion of this proceeding.
In addressing allocation issues, we keep in mind that some deliverers of electricity to the California grid are also retail providers of electricity for consumers. We also recognize that allocation policy will have an impact on consumer costs. Our intent in developing additional allocation policy recommendations is to ensure that GHG emissions reductions are accomplished equitably and effectively, at the lowest cost to consumers. While we may wish to reward early actions to reduce GHG emissions in advance of 2012 when the AB 32 compliance period begins, it is not our intent to treat any market participants unfairly based on their past investments or decisions made prior to the passage of AB 32.
We have determined that the next portion of this proceeding can be most focused and productive if a few major design principles are adopted in this decision. As a starting principle, it is important that any policy for distribution of allowances provide that revenues from the sale of allowances be used primarily to benefit consumers in the energy sectors directly. This is because energy sources such as electricity and natural gas are vital commodities. Thus, we believe special focus is warranted for allowance allocation policy in the energy sectors.
The method by which GHG emission allowances are distributed will affect liquidity in the emission allowance market; incentives to invest in low-GHG technologies and fuels, including energy efficiency; the potential for windfall profits; and costs to various groups of stakeholders.
With these impacts in mind, we recommend that some portion of the emission allowances available to the electricity sector should be auctioned. Among the options under consideration would be to phase in auctioning beginning with a small percentage in the first year and transitioning to greater percentages over time as the State and market participants gain experience with auctions. We make the recommendation for some auctioning in order to promote least-cost solutions throughout the California economy, promote liquidity in the emission allowance market, improve the accuracy of emission allowance prices as a reflection of marginal emission reduction costs, improve investment incentives, avoid windfall profits at consumer expense, and allow new market entrants easy access to allowances.
An integral part of this auction recommendation is that the majority of the proceeds from the auctioning of allowances for the electricity sector should be used in ways that benefit electricity consumers in California, such as to augment investments in energy efficiency and renewable energy or to provide customer bill relief. There are multiple ways to accomplish allocation of benefits to consumers.
As we discuss in this decision, additional record development is needed to allow us to make more complete recommendations on allowance distribution issues, including the proper mix between auctions and administrative allocations of emission allowances for the electricity sector, the manner in which auction proceeds should be used for the benefit of electricity consumers, and the manner in which any administrative allocations should be made. We will consider various options for the allocation of allowances, including to retail providers and/or deliverers. The concerns of all parties, along with potential solutions, will be considered carefully.
A cap-and-trade market structure must address the potential for volatility in the price of GHG emission allowances. In order to avoid short-term allowance availability problems and send appropriate long-term investment signals, a certain degree of stability in allowance prices is needed. Mechanisms that could be used to help ensure stability of allowance prices include, but may not be limited to, banking or borrowing of allowances, allowance price floors or ceilings, and GHG offsets. We will continue to explore these options and plan to address them in a later decision in this proceeding.
In addition, the modeling work being conducted in coordination with this proceeding is likely to help us answer more analytical questions about the impact of possible allowance distribution policies and other flexible compliance mechanisms on consumers and companies in the electricity sector.
Finally, in response to comments on the proposed decision, we plan to consider further the treatment of combined heat and power (CHP) facilities under this policy framework. We want to avoid unintended negative consequences for CHP, which may be a valuable source of additional GHG emissions reductions in California. Therefore, we intend to consider further the treatment of emissions from CHP facilities in the next portion of this proceeding, and plan to include recommendations on this issue to ARB in our next decision.
1.2. Natural Gas Sector
For purposes of this decision, we include in the natural gas sector combustion of natural gas that is not otherwise likely to be regulated by ARB as a point source. Natural gas combustion for electricity generation is covered under the electricity sector and combustion at large industrial facilities will be covered as industrial emissions. Therefore, for purposes of this decision, the natural gas sector is defined to include end-user combustion at facilities below ARB's reporting threshold for GHG emissions, as well as emissions from natural gas infrastructure, including fugitive emissions from pipelines and compressor stations.
For this portion of emissions associated with the use of natural gas, we recommend that all entities that provide transportation, distribution, and/or retail sales of natural gas to end-users (natural gas providers) in California be required to provide a minimum level of energy efficiency or other demand reduction programs to their customers. Energy efficiency is the best available approach to drive GHG reductions in California's natural gas sector. Therefore, we recommend that all natural gas providers in California, regardless of regulatory structure or status, be required to deliver energy efficiency to consumers. Fundamentally, energy efficiency provides a base of GHG reductions that are permanent and continuous through 2020. We expect these regulations to continue to be enhanced over the AB 32 period. We also expect to consider other programmatic options for reducing demand for natural gas including the use of solar hot water heating equipment.
We recommend that the natural gas sector not be included in a cap-and-trade system at this time. There are several reasons for this recommendation. Key differences between the electricity and natural gas sectors persuade us that it would be premature to include the natural gas sector in a cap-and-trade system:
· Significantly fewer options exist to reduce GHG emissions in the natural gas sector compared to the electricity sector.
· There is currently very limited availability of low-carbon alternative sources of natural gas.
· Energy efficiency and other natural gas demand reduction programs are the best options for reducing GHG emissions in the natural gas sector.
· The incremental benefits from including the natural gas sector in a multi-sector cap-and-trade program are likely to be smaller than those for the electricity sector.
· Reporting protocols for GHG emissions are still under development.
· Relying on programmatic measures to achieve emission allows additional time to develop reporting protocols.
As California gains greater experience with a cap-and-trade system, regional and national frameworks are established, reporting protocols are adopted, and alternative lower-carbon sources of natural gas are developed, we expect that it will become appropriate to add the natural gas sector to the multi-sector GHG emissions allowance cap-and-trade system, and we expect to recommend inclusion of the natural gas end-use sector at that time. Taking direct programmatic actions in the meantime is also compatible with the potential inclusion of the natural gas sector in an upstream form of regulation in the future.
1 California Health and Safety Code Section 38530(a), added by AB 32.
2 The relevant portions of Part 5 of AB 32 are as follow:
38570. (a) The state board may include in the regulations adopted pursuant to Section 38562 the use of market-based compliance mechanisms to comply with the regulations.
(b) Prior to the inclusion of any market-based compliance mechanism in the regulations, to the extent feasible and in furtherance of achieving the statewide greenhouse gas emissions limit, the state board shall do all of the following:
(1) Consider the potential for direct, indirect, and cumulative emission impacts from these mechanisms, including localized impacts in communities that are already adversely impacted by air pollution.
(2) Design any market-based compliance mechanism to prevent any increase in the emissions of toxic air contaminants or criteria air pollutants.
(3) Maximize additional environmental and economic benefits for California, as appropriate.
(c) The state board shall adopt regulations governing how market-based compliance mechanisms may be used by regulated entities subject to greenhouse gas emission limits and mandatory emission reporting requirements to achieve compliance with their greenhouse gas emissions limits.
* * *
38574. Nothing in this part or Part 4 (commencing with Section 38560) confers any authority on the state board to alter any programs administered by other state agencies for the reduction of greenhouse gas emissions.
