2. Background
In the Order Instituting Rulemaking (OIR) initiating R.06-04-009, the Public Utilities Commission provided that Phase 2 of this proceeding would be used to implement a load-based GHG emissions cap for electricity utilities, as adopted in 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.4
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.
A prehearing conference was held 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,"5 including both investor-owned utilities that the Public Utilities Commission regulates and publicly-owned utilities.
As detailed in the Phase 2 scoping memo, the Public Utilities Commission and the Energy Commission have undertaken 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.6
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.7 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 its 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.
ARB is taking the lead in developing reporting protocols and requirements for all parties 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.
In D.08-03-018 and a companion Energy Commission decision, the Public Utilities Commission and the Energy Commission recommended that ARB adopt a mix of direct mandatory/regulatory requirements for the electricity and natural gas sectors and a multi-sector cap-and-trade program for GHG emissions allowances that includes the electricity sector. In particular, we recommended that ARB set requirements at the level of all cost-effective energy efficiency in the State. For electricity from renewable energy, we recommended that the requirements go beyond the current 20% requirement, consistent with State policy, but we left open consideration of exact percentage requirements or deadlines, pending further analysis. We concluded that any cap-and-trade program design for California should include a component for imported electricity. We recommended that ARB designate deliverers of electricity to the California grid, regardless of where the electricity is generated, as the electricity sector entities responsible for compliance with the cap-and-trade requirements. The recommended "deliverer" approach is a variation of the "first seller" approach recommended by the Market Advisory Committee. We recommended further that some portion of the emission allowances available to the electricity sector should be auctioned. An integral part of this auction recommendation is that the majority of the proceeds from auctioning of allowances for the electricity sector should be used in ways that benefit electricity consumers in California. In the same decision, we determined that additional record development was needed before recommendations could be made on the remaining issues in Phase 2 including GHG emissions allowance allocations, flexible compliance mechanisms, and the treatment of CHP facilities.
As part of our Phase 2 analysis, the Public Utilities Commission retained consultants E3 to conduct detailed modeling of the electricity sector impacts of potential GHG emissions cap scenarios. The modeling analysis has considered various policy options in order to analyze alternatives for cap design and implementation for the electricity sector. The consultants also considered the natural gas sector in their modeling process. However, separate, detailed modeling of the natural gas sector was not undertaken. The modeling effort has examined the level and costs of emission reductions that can be achieved by the electricity and natural gas sectors by the 2020 deadline set by AB 32. It has also addressed the rate at which these types of reductions can be achieved, in order to inform our recommendations for annual emissions goals for the electricity and natural gas sectors.
By an Administrative Law Judge (ALJ) ruling dated April 16, 2008, parties were asked to file comments on a joint Public Utilities Commission and Energy Commission staff paper that analyzed several potential methods for the allocation of GHG emission allowances, and to respond to certain questions addressing GHG emission allowance policies. On April 21 and 22, 2008, the Public Utilities Commission and the Energy Commission held a workshop on emission allocation methodologies and preliminary model results.
By ALJ ruling dated May 1, 2008, parties were asked to file comments on a joint Public Utilities Commission and Energy Commission staff paper on CHP and to respond to a series of questions contained in the staff paper.
On May 2, 2008, the Climate Action Team Subgroup on Electricity and Natural Gas, ARB, the Public Utilities Commission, and the Energy Commission sponsored a workshop on regulatory strategies for the electricity and natural gas sectors. At the workshop, the agencies described present and future non-market based emission reduction measures. By ALJ ruling dated May 13, 2008, parties were asked to file comments on emission reduction measures and certain other issues, materials from previous workshops (May 2, 2008 and May 6, 2008) were incorporated into the record, and revised model results were provided to the parties.
By ALJ ruling dated May 6, 2008, parties were asked to respond to a series of questions regarding possible policies for flexible compliance in a cap-and-trade program as it may pertain to the electricity sector. The ruling also incorporated into the record two documents prepared by ARB and two documents prepared by the Western Climate Initiative that address flexible compliance mechanisms.
On June 26, 2008, ARB issued its June 2008 Discussion Draft of the Climate Change Draft Scoping Plan (Draft Scoping Plan). Pursuant to Rule 13.9 of the Public Utilities Commission Rules of Practice and Procedure, we take official notice of the Draft Scoping Plan and the Appendices to the June 2008 Discussion Plan issued shortly thereafter. The recommendations we have made in previous decisions in this proceeding, as well as the recommendations we adopt today are intended to guide ARB in developing rules and regulations and in its further activities implementing AB 32.
Today's decision is based on information presented at the workshops, the staff papers on allocation and CHP issues, materials incorporated into the record by ALJ rulings, and comments filed by the parties in this proceeding.
4 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.
5 Phase 2 scoping memo, at 8.
6 Id. at 10-11.
7 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.
