COM/MP1/ALJ/MEG/hkr Mailed 2/17/2006

Decision 06-02-032 February 16, 2006

BEFORE THE PUBLIC UTILITIES COMMISSION OF THE STATE OF CALIFORNIA

Order Instituting Rulemaking to Promote Policy and Program Coordination and Integration in Electric Utility Resource Planning.

Rulemaking 04-04-003
(Filed April 1, 2004)

OPINION ON PROCUREMENT INCENTIVES FRAMEWORK

TABLE OF CONTENTS

Title Page

OPINION ON PROCUREMENT INCENTIVES FRAMEWORK 2 2

1. Summary 2 2

2. Background 5 5

3. Threshold Policy Issues 11 11

3.1. Role of a Greenhouse Gas (GHG) Cap in Procurement Policies 11 11

3.1.1. Positions of Parties 11 11

3.1.2. Discussion 15 15

3.2. Type of Cap on GHG Emissions 17 17

3.2.1. Positions of Parties 17 17

3.2.2. Discussion 18 18

3.3. Applicability of Cap 20 20

3.3.1. Positions of Parties 20 20

3.3.2. Discussion 20 20

3.4. Role of Financial Incentives 27 27

3.4.1. Positions of Parties 27 27

3.4.2. Discussion 30 30

3.5. Interaction of GHG Cap and Financial Incentives 33 33

3.5.1. Positions of Parties 33 33

3.5.2. Discussion 34 34

4. Implementation Issues 35 35

4.1. GHG Emissions Baselines and Adjustments
to Reduction Requirements Over Time 36 36

4.1.1. Positions of Parties 36 36

4.1.2. Discussion 38 38

4.2. Allocation of GHG Allowances 41 41

4.2.1. Positions of Parties 41 41

4.2.2. Discussion 42 42

4.3. Flexible Compliance 43 43

4.3.1. Positions of Parties 43 43

4.3.1.1. Offsets 43 43

4.3.1.2. Trading 44 44

4.3.1.3. Banking and Borrowing 45 45

4.3.2. Discussion 46 46

4.4. Penalties 46 46

4.4.1. Positions of Parties 46 46

4.4.2. Discussion 47 47

4.5. Emissions Registration 47 47

4.5.1. Positions of Parties 47 47

4.5.2. Discussion 48 48

4.6. Continuation of GHG/Carbon Adder 49 49

4.6.1. Positions of Parties 49 49

4.6.2. Discussion 50 50

4.7. Treatment of GHG Emissions From Natural Gas
for Purposes Other Than Electricity Generation 50 50

5. Other Issues 52 52

6. Next Steps 53 53

7. Comments on Draft Decision 53 53

8. Assignment of Proceeding 58 58

Findings of Fact 58 58

Conclusions of Law 64 64

ORDER 66 66

ATTACHMENT 1

OPINION ON PROCUREMENT INCENTIVES FRAMEWORK

1. Summary¹

Today we state our intent to develop a load-based cap on greenhouse gas (GHG) emissions for Pacific Gas and Electric Company (PG&E), San Diego Gas & Electric Company (SDG&E), Southern California Edison Company (SCE), and non-utility load serving entities (LSEs) that provide electric power to customers within these respondents' service territories. Over the longer term, we also intend to develop a GHG limitation program that includes emissions from the natural gas sector, as the requisite emission reporting and certification protocols become available.

As discussed in this decision, we will establish a baseline for the GHG emissions cap on a historical year basis, with 1990 as our preferred reference year. Our final determination on this matter will await further consideration of implementation issues associated with using this particular year as the reference, including the availability of adequate historical emissions data for the investor-owned utilities (IOUs) and other LSEs. We also leave to the implementation phase our consideration of the appropriate level of emissions reductions (and associated caps) over time, relative to the base year.

We intend to create a load-based GHG emissions cap that is compatible with any other GHG cap-and-trade regime that may be developed in the future, either in the Western Region, nationally, or internationally. Therefore, the GHG emissions allowances associated with our load-based cap will be in the form of "tons of carbon-dioxide equivalent." Based on the record in this proceeding, our preference is to administratively allocate these allowances, rather than auction them.

All parties recognize that flexible compliance options are an integral component of a GHG emissions cap, but differ with regard to the scope and type of options that should be available, at least initially, as the Commission implements a GHG emissions reduction program. For the reasons discussed in this decision, we leave to the implementation phase our determination of flexible compliance options, including the scope of offsets, trading, banking and borrowing of allowances. We conclude that some form of penalty structure for non-compliance is necessary, or else the GHG reduction requirements will only be voluntary. At this juncture, we prefer structuring penalties as alternative compliance payments, but will further explore the nature of an appropriate penalty mechanism along with our consideration of flexible compliance options during the implementation phase. We will also evaluate the costs and benefits of the framework that emerges from the implementation phase. Throughout this process, we will continue to coordinate our efforts with the Governor's Climate Action Team as well as other state, regional or federal agencies that are exploring design options for cap-and-trade programs.

In conjunction with a load-based emissions cap on electric procurement, we will pursue the development of shareholder incentives in resource-specific proceedings, with our immediate focus on energy efficiency. As discussed in this decision, we will also explore the concept of allowance sale incentives during the implementation phase. Under this mechanism, the Commission would certify GHG emission allowances based on superior performance, as defined by the Commission, that the utilities could sell outside of California to the benefit of their shareholders.

We delegate to the Assigned Commissioner and Administrative Law Judge (ALJ) the scoping of the implementation steps necessary to implement our policy decision today for adoption in a future decision in this proceeding or a successor proceeding. Those implementation steps include, but are not limited to: (1) quantifying the GHG emissions baseline for each LSE, (2) adjusting GHG emission reduction requirements over time, relative to the baseline, (3) adopting and administering a process for allocating emissions allowances, and (4) developing flexible compliance mechanisms with appropriate performance penalties.

In the meantime, we require LSEs, when they file their 2006 procurement plans, to include information about existing GHG emissions profiles and the future GHG emissions implications of their procurement plans.

As discussed in this decision, our preference would be to require the immediate registration of emissions by all generation resources serving California load with the California Climate Action Registry (CCAR). CCAR is a non-profit public/private partnership that serves as a voluntary GHG registry of participating companies' emission profiles. Participating power generators and electric utilities account for and report GHG emission inventories according to the CCAR's reporting protocols. PG&E, SCE, and SDG&E are already voluntary members of CCAR.

However, there is more work to be done before this requirement can be implemented effectively. During the implementation phase, we will explore with CCAR ways in which their protocols can be modified to include generation/facility specific data to fit within a load-based cap, and establish a date by which all power purchase agreements that PG&E, SDG&E, and SCE sign for power should include a provision requiring supplier registration with the CCAR. We may extend this requirement to the smaller electric IOUs under our jurisdiction after further consideration of this issue in a proceeding to which these companies are also respondents.

As discussed in this decision, we fully intend to continue to collaborate with Governor Schwarzenegger's Climate Action Team and to coordinate today's adopted policies with the administration's GHG reduction policies and goals. In particular, we will continue to work with the Governor's Climate Action Team to ensure that municipal utilities are also subject to a GHG emissions reduction regime that will assist California in meeting the aggressive GHG reduction goals articulated in Executive Order S-3-05.

We also note that, with this decision, we are joining in the pioneering efforts on greenhouse gas regulation started in the Northeast and Mid-Atlantic states with the voluntary Regional Greenhouse Gas Initiative there. We hope that these parallel but distinct efforts on both coasts will help move the ball forward on initiatives to reduce greenhouse gas emissions and mitigate global climate change in the United States and around the world.

¹ Attachment 1 describes the abbreviations and acronyms used in this decision.

1. Summary1

1. Summary¹