VI. Performance Guarantees
1. Parties' Positions
PG&E proposes to use CPT premiums to purchase contracts for GHG reductions, first in the forestry sector and later in other areas. While PG&E projects that it will be able to purchase a certain number of tons of emissions reductions, and a certain dollar value of forestry contracts, these projections depend on PG&E obtaining projected numbers of CPT customers. The fewer customers PG&E attracts, the lower will be its program revenues, and the fewer the number of GHG emissions reductions for which PG&E can contract.
The parties ask for two competing performance guarantees if the program is not as successful as PG&E projects.
First, PG&E seeks ratepayer guarantees in case its projections of how much it will have to pay per ton of GHG emission reductions changes. PG&E assumes that reductions will cost $9.71 per ton. Several parties challenge this number (as too high), and PG&E acknowledges that there are price risks inherent in procurement of GHG reductions in a relatively nascent market. While PG&E anticipates that the costs of sequestration projects are likely to remain stable throughout the program's demonstration period, unforeseen circumstances could change that situation, forcing PG&E to look for other, less costly, GHG reductions to meet the "climate neutral" pledge to its customers. There is an outside chance that the GHG marketplace could change so radically as to make meeting the pledge impossible at the specified premium (i.e., program costs could outstrip the premiums for the program). PG&E therefore states that it "should be adequately protected, and not punished, for its willingness to assist in the development of the nascent GHG reduction market in the face of the above, admitted, uncertainties."23
Under PG&E's proposal, if the present value of the cost of commitments made or still required for "climate neutrality" under the GHG reduction contracts exceeds the revenues collected from CPT customers at the end of three years of program operation, PG&E will charge the difference between the cost of its contractual commitments and CPT revenues to existing balancing accounts.24 Ratepayers would essentially guarantee PG&E against any program losses.
No party supports PG&E's proposed backstop mechanism.
The second proposed performance guarantee comes from parties seeking changes in PG&E's program. They ask for PG&E's shareholders to ensure that the program results in a certain threshold of GHG reductions, in order to justify the expense ratepayers will incur in A&M costs. CCSF, for example, proposes that PG&E's CPT program be required to purchase a minimum of 1.7 million tons of CO2 reductions by the end of the three-year demonstration period, and if CPT premiums are inadequate to meet this goal, that PG&E shareholders purchase the difference.
TURN supports CCSF's proposal, noting that "PG&E's failure to offer any accountability measures, combined with speculative GHG reduction cost estimates and aggressive participation rates, creates the real risk that nonparticipant ratepayers will be forced to pay for a program that does not achieve the advertised results." TURN states that, "If PG&E chooses to offer the promise of climate neutrality but fails to procure GHG reductions at expected prices, the risk of that failure should fall on PG&E shareholders and program participants."25
PG&E opposes the parties' minimum GHG reductions proposal.
2. Discussion
We reject PG&E's backstop funding proposal that would have ratepayers guarantee any shortfall resulting from PG&E's contracts for emissions reductions. We adopt, in part, the parties' proposal for a requirement that PG&E procure a minimum amount of GHG reductions as a result of the costs it will incur to run the program.
PG&E's backstop funding proposal is inconsistent with its testimony elsewhere in the record. PG&E's witness San Martin stipulated that PG&E would enter into contracts only as revenues were collected from participants.26 While PG&E attempts in briefs to explain why it still would incur contracting risk, we fail to see how this could happen if PG&E contracts only with revenue it has already collected.
DRA provides some insight into how PG&E could incur contract risk even if it did not sign GHG reduction contracts before collecting program premiums:
DRA agrees with PG&E that risks remain even if PG&E funds contracts only as revenues are collected from participants, and even if the contracting party is paid every year based on that year's performance. For example, fire is an inherent and acknowledged risk of forestry programs. If in the future a fire destroys a forest and the contractor is unable to perform under the agreement, it is possible that that cost of procuring offsets at that time will exceed available revenues.27
We do not believe PG&E has adequately justified why ratepayers should bear this risk, especially for a voluntary program. If anything, the evidence shows that PG&E's $9.71 per ton of GHG reductions is too high, rather than too low. PG&E based its $9.71 per ton value on a report used in the Commission's "Avoided Cost" proceeding, Rulemaking 04-04-025. However, that report adopts an $8 per ton figure in 2005. Thus, if anything, PG&E will be able to contract for greater GHG reductions than it assumes, since the per-ton cost will be lower than PG&E's $9.71 figure.
Further, as we discuss above, the program expenses are very high in relation to the revenues the CPT will generate ($16.4 million in costs as compared to $20-$30 million in revenues). We are not requiring PG&E to guarantee that its demonstration program is cost effective.28 Thus, it is unreasonable in addition to allowing PG&E to proceed with a very expensive - if meritorious - program, to make ratepayers liable for an unspecified amount in the future. Rather, PG&E should be prudent in contracting, and use the reporting mechanism to keep the Commission informed if the company encounters difficulties.
We adopt CCSF's minimum GHG reduction proposal in part. Ratepayers should be assured a minimum number of tons of GHG reductions in light of the cost of the program.
CCSF proposes that PG&E guarantee a minimum of 1.7 million tons of GHG reductions. PG&E projects a total three year CO2 emission reduction of 2 million tons. This number assumes growing rates of participation over the three years of program operation.29
A fair guarantee is 75% of PG&E's proposed reductions. Thus, we find that PG&E should guarantee that it has contracted for 1.5 million (75% of 2 million) tons of CO2 equivalent reductions30 over the three years of program operation. If PG&E is unable to procure this level of reductions from CPT premiums, it shall use other, non-ratepayer funding to purchase offsets to reach the 1.5 million ton level.
PG&E need not use shareholder funding for these reductions. For example, PG&E may ensure a significant level of GHG reductions by signing its own facilities up for the CPT program, making itself climate neutral (under the terms of the CPT) and contributing large GHG reductions, and revenues, to the program. In addition, TURN proposes a modification of PG&E's program (which we reject in this decision for lack of a record) that may provide a method for PG&E to procure GHG reductions with less expense than PG&E assumes. TURN's program is essentially an offset-only program, in which PG&E would use ratepayer dollars to procure the same 2 million tons of GHG reductions, but would purchase them directly. PG&E would not incur the expense of acquiring customers, reducing the program's overhead.
If PG&E were to find during the three year demonstration program that acquiring customers was far more expensive or difficult than projected, it might seek, by application, a modification of its program. We would allow PG&E at that time to propose other means of meeting the 1.5 million tons of GHG reduction targets in its application or the minimum we require here. One such means would be through direct purchase of reductions. We would have to know the specifics of PG&E's proposal at that time, and it could not duplicate other, mandated programs. However, PG&E may be able to meet the minimum by redirecting unspent A&M dollars.
23 PG&E opening brief at 47.
24 PG&E Exhibit 1, at 5-3.
25 TURN opening brief at 21.
26 PG&E opening brief at 46.
27 DRA reply brief at 10.
28 Indeed, Aglet concedes that it "does not believe that rigorous cost effectiveness testing should be required for what PG&E admits is a demonstration program." (Aglet opening comments at 4.) At the same time, Aglet proposes some accountability in the program design, which we require elsewhere in this decision.
29 For example, PG&E projects that in the first year, assuming a weighted average customer enrollment of 0.4%, approximately $1.5 million in revenues would be available for the CPT to invest in forest sequestration projects. At $9.71 per ton of CO2, the program would achieve CO2 emission reductions in the first year of approximately 155,000 tons. In year three, PG&E projects 1.21 million tons of emissions reduction (assuming a 3.3% weighted average enrollment rate, revenues of $11.7 million from CPT premiums, and $9.71 per ton of reductions).
30 Some greenhouse gases create far more global warming than CO2. However, to calculate the impact of emissions reductions of the other gases (methane, nitrous oxide, hydrofluorocarbons, perfluorocarbons, and sulfur hexafluoride), one uses CO2 as a baseline. Thus, reductions in methane and the other greenhouse gases can be translated to CO2 equivalent so that reductions in the different gases can be compared.
