3. Context and Policy Objectives
As discussed above, the Commission's GHG Policy Statement provided the Commission's initial policy context for consideration of an EPS in this rulemaking, while SB 1368 now also provides the statutory context. The principles and objectives articulated in each are nearly identical.35 Both observe that California will need to rely on clean and efficient fossil-fired generation to the extent that energy efficiency and renewable resources are unable to satisfy increasing energy and capacity needs, consistent with the policies of the Energy Action Plan (EAP).36 In addition, the Commission's GHG Policy Statement and SB 1368 recognize that:
(1) California's investor-owned utilities are currently making new long-term financial commitments to electrical generating resources that will have major impacts on GHG emissions for many years to come.
(2) It is vital to reduce California's exposure to costs associated with future federal regulation of GHG emissions.
(3) A GHG emissions performance standard for new long-term financial commitments to electrical generating resources will reduce potential financial risk to California consumers for future pollution-control costs.
(4) A GHG emissions performance standard for new long-term financial commitments to electric generating resources will reduce potential exposure of California consumers to future reliability problems in electricity supplies.
(5) The establishment of a policy to reduce emissions of greenhouse gases, including an emissions performance standard for all procurement of electricity by LSEs, is a logical and necessary next step to meet the goals of the EAP and the Governor's goals for reduction of emissions of greenhouse gases, and
(6) As the largest electricity consumer in the region, California has an obligation to provide clear guidance on performance standards for procurement of electricity by LSEs.
As articulated above, the primary objective of an EPS is to reduce California's exposure to the compliance costs associated with future GHG emissions (state and federal) and associated future reliability problems in electricity supplies. To meet this objective, an EPS functions similar to an appliance efficiency standard by ensuring that an LSE does not enter into long-term financial commitments with high-emitting baseload resources in the first place. For example, if a consumer wants to purchase a new refrigerator in California, he or she has a variety of models to choose from - each with a different upfront purchase price, operating efficiency and associated cost per kWh to run, and design. However, at a minimum, each refrigerator must meet the threshold for appliance efficiency established by the standard. Similarly, SB 1368 establishes a minimum threshold of performance for any baseload generation facility that represents a new long-term financial commitment entered into by entities providing power to California ratepayers.
Some parties argue that our current oversight of utility resource planning is sufficient to achieve the Commission's procurement objectives, and therefore an EPS is not needed. In particular, San Diego Gas & Electric Company and Southern California Gas Company (SDG&E/SoCalGas) argue that the EAP "loading order" priorities and RPS program requirements render an interim EPS unnecessary.37 We disagree. While loading order priorities and RPS requirements may reduce the overall size of the procurement needs to be filled by fossil-fired baseload generation, they do not establish safeguards against the risks associated with long-term procurement commitments to high GHG-emitting fossil-fired generation facilities. In fact, the EPS specifically addresses the last critical element of the EAP loading order, which prioritizes clean, efficient fossil generation.
Nor does the use of a GHG adder in the utility procurement process serve to adequately protect California ratepayers from these risks, as some parties suggest. The GHG adder, which assigns a $/ton cost to GHG emissions, is used to reflect one factor among many for utility competitive procurement and not as a regulatory standard. While the GHG adder would make procuring electricity from high-GHG emitting resources more expensive, thereby serving as a disincentive, it would still allow LSEs to procure from the dirtiest resources in some cases. The use of the GHG adder, therefore, could still result in a significant number of new long-term financial commitments with powerplants emitting GHGs that far exceed the EPS-an outcome that this Commission and the Legislature recognize would pose substantial financial and reliability risk to California ratepayers.38 In contrast, the interim EPS sends clear direction that California has "raised the bar" for the GHG emissions performance of new long-term commitments with baseload generation serving California as we transition to a statewide, load-based GHG emissions cap.
It is within this context that we turn to the specific design and implementation of an interim EPS. As discussed in the Assigned Commissioner's scoping memo, our focus today is to adopt an interim standard that will serve as a near-term bridge to the load-based GHG cap adopted under the Commission's Procurement Incentive Framework.39 This focus is consistent with SB 1368, which directs the Commission to "reevaluate and continue, modify, or replace" the GHG performance standard adopted pursuant to the new law when "an enforceable" GHG emissions limit is established and in operation that is applicable to LSEs.40 Consistent with the provisions of SB 1368, we will reevaluate the interim standard through a rulemaking proceeding and in consultation with the CEC and CARB.
Therefore, today's decision focuses on the most appropriate design parameters for an interim EPS, rather than a permanent one. SB 1368 also requires that the standard be established no later than February 1, 2007 and be enforced immediately upon its establishment.41 Accordingly, we will consider the various Phase 1 proposals in the context of this implementation timeframe.
Our overall objective is to design an interim performance standard that focuses on new long-term financial commitments to electrical generating resources that will have major impacts on GHG emissions for many years to come. This enables us to prevent major LSE procurement "backsliding" that will make future GHG reductions more difficult. In this way, we can accomplish the key objective for the EPS, namely, to minimize the risk of new financial commitments that pose the greatest risk of raising future compliance costs to ratepayers and of causing future reliability disruptions in electricity supplies.42 We also seek to develop an EPS that is relatively simple to administer and implement, and that will keep the analysis and application of the standard to various resources transparent.
35 See GHG Policy Statement, pp. 1-2 and SB 1368, Section 1, (a)-(l).
36 The EAP adopted in May 2003 (and augmented by the October 2005 EAP II implementation roadmap) sets forth a blueprint for achieving the state's overall goal of adequate, reliable, and reasonably priced electrical power and natural gas supplies. Among other things, the EAP identifies the following "loading order" of energy resources that guides decisions made by this Commission and the CEC: (1) conservation and energy efficiency first, in order to minimize increases in electricity and natural gas demand, (2) renewables and distributed generation second, in recognition that new generation is both desirable and necessary, and lastly (3) clean and efficient fossil generation to the extent that (1) and (2) are not sufficient to meet California's energy needs.
37 Post-Workshop Comments of SDG&E/SoCalGas, June 27, 2006, p. 2. See the footnote above for a description of the EAP loading order. In addition, by law, electricity production from eligible renewable energy resources must equal at least 20% of the total electricity sold to retail customers in California per year by December 31, 2010. (SB 107, Stats. 2006, ch. 464.) The RPS program was established by this Commission to implement these requirements, and RPS-related issues are addressed in R.06-02-012 and R.06-05-027.
38 This can occur under the following type (or combination) of circumstances: (1) the level of upfront investment costs or power purchase contract prices associated with a high GHG-emitting powerplant are low relative to the discounted stream of emission-related costs captured by the $/ton GHG adder, (2) the operating and fuel costs of the high GHG-emitting powerplant are significantly lower than those of an EPS-compliant alternative, and/or (3) the upfront costs or power purchase prices associated with an EPS-compliant alternative are significantly higher than those of the high GHG-emitting powerplant, even if the operating or fuel costs are relatively low. There is no way to ensure through the use of a $/ton GHG adder (even one that is higher than the current level) that all long-term commitments to baseload generation facilities that emit above a certain performance threshold will be precluded, since each calculation will depend on variables unique to the type of alternatives analyzed and on assumptions that may vary significantly over time (e.g., fuel prices, construction costs, contract prices or discount rates).
39 June 1, 2006 ACR, p. 1.
40 § 8341(g).
41 § 8341(d).
42 See Section 1 of SB 1368, subsections (i) and (j).
