California Balancing Authority with
Out-of-State Transmission

At least one California balancing authority (LADWP) controls transmission from sources located outside of the State that are considered part of its balancing authority territory. Thus, E-tags are not generated for this power when it is delivered to California. SCE suggests that the regulated imports be identified based on their first delivery to "a point of delivery within a California balancing authority" rather than their delivery to "a point of delivery within California." If that approach were taken, E-tags associated with deliveries to the balancing authority at an out-of-state Point of Delivery could be used to determine the deliverer at that delivery point.

However, the Point of Delivery at which ownership is used for AB 32 compliance purposes should be physically within the State. As PG&E suggests, alternative documentation may need to be used to identify the owner of imports that do not have E-tags at the Point of Delivery to the California grid.

Multi-jurisdictional Utilities

Multi-jurisdictional utilities serve retail customers in a service territory that overlaps the State border, e.g., PacifiCorp and Sierra Pacific. The proposed decision suggested that multi-jurisdictional utilities should be regulated using a retail provider-based approach, rather than a deliverer approach. The proposed decision reached this conclusion based on measurement and tracking concerns arising because the balancing authorities of these retail providers encompass service territory both inside and outside of California and, thus, no E-tags are generated for imports into California. For the multi-jurisdictional utilities, the initial measurable deliveries of electricity to the California grid occur at the distribution level to their retail customers. Moreover, the sources of electricity used to serve the California customers currently cannot be distinguished from the sources used to provide electricity for the entire balancing authority. For these reasons, the measurement protocols that apply to other deliverers are not workable for the multi-jurisdictional utilities at this time.

In comments, Sierra Pacific takes issue with the proposed decision's conclusion that a retail provider point of regulation should be used for multi-jurisdictional utilities, while PacifiCorp supports the proposed decision in this regard. In its comments on the proposed decision, Sierra Pacific implies that a retail provider point of regulation for the multi-jurisdictional utilities might have the effect of requiring them to reduce the carbon footprint for all of their customers, most of whom are located in other states. It is not our intent to require multi-jurisdictional utilities to change how they provide electricity to customers in other states. For this reason, we find that GHG emissions associated with multi-jurisdictional utilities' deliveries of electricity to California should be regulated using the deliverer approach. Nevertheless, the methodology for tracking and accounting for the GHG attributes of the electricity these utilities deliver to California may not be identical to that of other entities not similarly situated.

As we stated in our reporting recommendations to ARB in D.07-09-017, "Multi-jurisdictional utilities would be required to report information for their operations that provide electricity to service territories that include end use customers in California. ARB would attribute GHG emissions to their California operations based on the proportional share of their electricity sales in California." This is the approach that ARB approved in its mandatory reporting protocols.

PacifiCorp supports a retail provider-based approach for multi-jurisdictional utilities, stating that,

The combination of utility-owned generating resources and resources providing contracted for power located throughout the western United States, coupled with load-serving responsibilities and multi-state cost structures, puts [multi-jurisdictional utilities] in the complicated position of having to equitably assign the costs of system energy, including emissions, to each state's retail load. Alternative rules should be developed for [multi-jurisdictional utilities] to address their complicated position in the western energy market. Given these unique circumstances and peculiarities of [multi-jurisdictional utilities], it is not disputed that under either the deliverer/first seller or the hybrid approach, PacifiCorp should be regulated according to the [retail provider]-based approach.

Regulating the emissions associated with the multi-jurisdictional utilities' deliveries of electricity to the California grid, with GHG emissions attributed based on a proportional share of their electricity sales in California, appears to be the only reasonable approach at this time. We anticipate making future recommendations to ARB, perhaps in 2009, concerning its mandatory reporting protocol in order to refine the recommendations provided in D.07-09-017 on reporting of GHG emissions in the electricity sector. We will consider revisions that would give multi-jurisdictional utilities greater flexibility to differentiate the power used for their California customers from the power used for their other customers. In any event, we will strive to ensure that the tracking and accounting methodology for the multi-jurisdictional utilities does not disadvantage them, or make it impossible for them to comply with the requirements of other jurisdictions in which they operate. If it should turn out that the unique circumstances of a particular multi-jurisdictional utility prevent application of a deliverer point of regulation to it, we will develop an alternative approach.

Power Whose Deliverer is a Federal Entity

Another situation relates to power whose deliverer, as generically defined above, would be a federal entity not subject to California regulation. In that situation, we agree with the proposed decision that the deliverer for AB 32 compliance purposes should be the first non-federal entity that owns the electricity thereafter on the physical scheduling path in California.

Independent Power and Renewable Power

In comments on the proposed decision, various independent power producers, including renewable generators, argue that they should not be regulated under a deliverer point of regulation. Among the issues raised are contractual language required by the Public Utilities Commission under which renewable generators assign "environmental attributes" to the IOUs, and contracts that allegedly do not permit inclusion of GHG emission allowance costs in prices received for the power. However, we see no reason why the existence of such contractual language would warrant an exception to our general recommendation that deliverers be legally responsible for GHG compliance under AB 32.

We note, however, that the deliverer's compliance obligation would not prevent parties from entering into contractual arrangements under which an entity other than the deliverer would shoulder the financial burden of compliance. For example, contractual arrangements could provide that the entity purchasing power from a deliverer pay for and obtain allowances which the deliverer would then surrender to meet its compliance obligation. Nor do we decide, in adopting a uniform deliverer approach, which entity would be required under Public Utilities Commission-mandated, or other, contractual language, to shoulder the financial costs of GHG compliance obligations.

We recognize that ARB may determine that certain kinds of renewable technologies do not produce any GHG emissions that should be subject to regulation under AB 32. Thus, although such generators may meet the criteria we establish for deliverers, they may not have any obligation to surrender allowances. However, renewable generation that ARB determines has GHG emissions subject to regulation under AB 32 should be treated like any other generation, in that the deliverer would have a GHG emissions compliance obligation.

In R.06-02-012, the Public Utilities Commission is considering whether to create a tradable REC program as a compliance mechanism for the RPS in California.²⁰ In addition, while RECs may be defined in R.06-02-012 for RPS compliance in California, other jurisdictions may define RECs differently for use in other markets, including compliance with renewable generation requirements, compliance with GHG emissions requirements, or compatibility with voluntary markets. We do not prejudge the question of how a deliverer of renewable generation that may unbundle and sell RECs separately should be treated for purposes of GHG compliance.

M-S-R Proposal

M-S-R is a joint powers authority among the Modesto Irrigation District, City of Santa Clara (dba Silicon Valley Power), and the City of Redding. In its comments on the proposed decision, M-S-R describes a situation in which certain power owned by M-S-R is delivered to a Point of Delivery just north of the California-Oregon border, at which point its member agencies take delivery.

In its comments, M-S-R suggests that "the point of delivery should be clarified to mean delivery to the WECC-recognized California grid whether within or without the physical boundaries of the State of California." Such a determination would result in using ownership at a Point of Delivery physically located in Oregon to determine the deliverer. As M-S-R's comments do not point to any real problems that will arise from our recommended definition, we decline to adopt its suggestion.

SMUD Proposal

SMUD describes in comments on the proposed decision that much of SMUD's in-state generation is held by joint powers authorities, with such plants dispatched by SMUD and with "all the energy delivered to the bus bar ... owned by SMUD." SMUD asserts that, in reading the proposed decision, it is not clear who would be considered the deliverer in this situation. SMUD recommends that "the definition of deliverer be delved into in much more detail in light of the wide spectrum of ownership arrangements that exist for plants in the state."

As described above, we have clarified our recommended definition of deliverer, with what we believe is sufficient detail for ARB to be able to resolve disputes that may arise. In making recommendations to ARB, it would not be fruitful for us to try to evaluate every existing contractual arrangement or try to anticipate possible future contractual arrangements to pass judgment on which entity owns the power as it is delivered to the California grid.

Small Generating Facilities

We recognize that ARB's reporting thresholds are such that a GHG compliance obligation under the deliverer approach would not apply to certain small facilities.

Reporting and Measurement under the Deliverer Approach

Several parties raise concerns about documentation that may be needed to establish the entity that is the deliverer, particularly for imported power that does not have E-tags. They also submit that E-tags are not sufficiently accurate to establish the source, and thus, emissions related to imported power. We agree that additional work will be needed on these reporting and measurement issues.

3.3.2.7. Legal Issues Related to Deliverer Point of Regulation

Federal Power Act

Several parties contend that a deliverer point of regulation would likely be preempted by the FPA. We have reviewed these, and the opposing, arguments, and conclude that a deliverer point of regulation is not preempted by the FPA.

LADWP argues that a GHG regulatory structure using a deliverer point of regulation may be struck down by the courts on the grounds that it regulates wholesale sales of electricity and therefore is preempted by the FPA, which applies, inter alia, to "the sale of electric energy at wholesale in interstate commerce" (16 U.S.C. § 824(b)(1)). We believe, however, that the use of a deliverer point of regulation should be upheld by the courts on the grounds that it is an environmental regulation whose purpose is to decrease the impact of global warming on California insofar as that impact is caused by electricity used or generated in California. The deliverer point of regulation does not single out wholesale sales of electricity, but rather applies uniformly to electricity consumed in California and electricity generated in California. As Morgan Stanley points out, the deliverer approach does not regulate wholesale generators, marketers, or transmission as such.

There is no "field preemption" here because in enacting the FPA, Congress did not intend, either explicitly or implicitly, to occupy the field of environmental regulation of the power sector. California will be regulating in a field (GHG emissions and their reduction) that Congress has not even addressed in the FPA, nor is there any suggestion in the FPA or in its administration that Congress intended to forbid states from enacting GHG regulations on their own. The regulations we are recommending to ARB are not directed at wholesale rates or service or the other terms and conditions of wholesale sales that are the focus of the FPA. Rather, they are directed at reducing GHG emissions associated with the generation of electricity in California and with ultimate electric service within California, matters left to the discretion of the states. Nothing in the part of the FPA at issue here²¹ or its legislative history suggests that Congress intended to occupy the field of environmental regulation, which is the sole purpose of the California law and proposed regulations at issue here.

Indeed, 16 U.S.C. § 824(a) states: "Federal regulation . . . [under the FPA extends] only to those matters which are not subject to regulation by the States." This broad savings clause supports the conclusion that because air pollution is subject to regulation by the States, and not by the FPA or FERC, state regulation of GHG emissions caused by the generation and consumption of electricity is not preempted by the FPA, but may be regulated by the States. While such GHG regulation may have some impact on the wholesale prices paid for electricity, it is no more preempted by the FPA than state regulations limiting the amount of other pollutants that may be emitted by electric power plants -- that may affect the cost of generating electricity and therefore indirectly affect the price of wholesale electricity.²²

We are recommending that allowances be surrendered based on the delivery of electricity to the grid. This does not mean that California would be regulating the grid. By choosing a deliverer point of regulation we are simply choosing a trigger that determines which entities have to comply, but what is being regulated is the amount of GHGs being produced in California or in order to supply electricity to customers located in California.

Even though our recommended point of regulation is the point of delivery to the grid, these GHG regulations are still essentially environmental regulations, and not a regulation of wholesale rates or other terms and conditions of wholesale power sales or electric transmission that the FPA and FERC do exclusively regulate, nor a requirement to obtain a license to engage in those activities.²³ Therefore our choice of this point of regulation does not mean that these GHG regulations are preempted by the FPA.

The regulations we are recommending to ARB are not directed at matters subject to FERC regulation²⁴ (nor are they directed at matters that the FPA has determined should be exempt from either state or federal regulation). They are directed at reducing GHG emissions and are intended to change the way that electricity is generated and consumed. For example, the GHG regulations are expected to increase the use of (i) renewable resources to generate electricity, (ii) low-emitting sources of generation, and (iii) more efficient methods of using electricity. To the extent such actions are not a cost-effective means of reducing GHG emissions associated with the use of electricity, these regulations are expected to result in investments outside of the electricity sector that will cost-effectively reduce GHG emissions from other activities.

The arguments that a deliverer point of regulation is preempted by the FPA do not take into consideration the subject-matter scope of the FPA and FERC's regulations. Here, we are proposing to regulate the environmental impacts of electric generation and consumption, whereas the FPA's regulation of wholesale sales does not cover the environmental impacts associated with electric generation, wholesale sales of electricity, or the consumption of electricity.²⁵ Because the FPA expressly leaves room for state regulations dealing with electricity and because there is nothing in the FPA that deals with the regulation of emissions (either generally, or GHG emissions specifically), the deliverer approach is not preempted by the FPA. The deliverer regulations we are recommending to ARB do not have as their central purpose the regulation of matters that Congress intended FERC to regulate. Even though ARB's regulations will wind up requiring some sellers of wholesale electricity to surrender allowances that fact does not establish preemption just because FERC regulates wholesale transactions for other purposes. The FPA does not address GHG emissions and therefore the recommended regulations do not fall within the limits of the comprehensive regulatory scheme enacted by Congress.

In short, there is no FPA field preemption here because, under AB 32, California will not be regulating the same subject matter as the FPA, nor will its regulations be for the same intended purpose. The objectives sought by AB 32 and the use of a deliverer point of regulation for the electricity sector are not the same as those sought by the FPA.

PacifiCorp argues that the FPA would preempt a deliverer point of regulation, because (i) under that approach the state of California would unilaterally determine which parties are allowed to participate in the wholesale energy market and (ii) the cost of buying allocations will affect the costs of wholesale energy. The deliverer point of regulation does not determine which parties are allowed to participate in the wholesale energy market. Any party that wishes may participate in the market, subject to a requirement that GHG allowances are surrendered after the end of the compliance period (or compliance is shown by another method). While this may impose costs on some participants in the wholesale energy markets, that does not mean that such regulation is preempted by the FPA. Pollution control requirements normally impose costs on participants in wholesale energy markets (such as generators), but that fact does not preempt states from imposing pollution control requirements.

CMUA suggests that there is a potential conflict between a deliverer point of regulation and the "electric reliability" section of the FPA, 16 USC § 824o. CMUA poses a hypothetical under which a high-GHG emitting facility would be unable to sell power into California that is needed for reliability purposes because there are insufficient allowances available. However, under the regulatory framework that we are proposing, allowances would not need to be surrendered at the time the power is delivered into California.²⁶ Rather, those entities with compliance obligations would only be required to surrender allowances, or otherwise comply with the regulations, after the end of a compliance period. Thus, an entity with compliance obligations (including an out-of-state generator) would have an opportunity, if it did not already possess enough allowances, to acquire allowances on the market or to show compliance using flexible compliance mechanisms such as offsets (to the extent they are allowed). In short, the GHG regulatory program we are proposing would not prevent even high-GHG sources from providing reliability services when needed. Thus, there will be no conflict with the FPA's electric reliability provisions.

In its comments on the proposed decision, SCPPA appears to argue that emissions reductions can only be achieved by directly affecting the wholesale price of imported electricity. That is not the case. Under a cap-and-trade system with a declining cap, the impending scarcity of GHG allowances is expected to drive investment in technological innovation, energy efficiency, and other measures to reduce GHG emissions, regardless of whether there is any impact on wholesale electricity prices.

²⁰ Currently, contracts for bundled RPS-eligible power purchases (where both the generation and its renewable attributes are sold to one purchaser in one transaction) define the REC to be separate from the GHG emission attributes (see D.07-02-011, as modified by D.07-05-057. See also Administrative Law Judge's Ruling Requesting Post-Workshop Comments on Tradeable Renewable Energy Credits, October 16, 2007, Attachment F-2, setting out the current RPS contract requirements in this regard.)

²¹ Parties arguing that there is FPA preemption rely on the portion of the FPA dealing with the Regulation of Electric Utility Companies Engaged in Interstate Commerce, 16 USC § 824, et seq.

²² The inclusion of any such costs in FERC-jurisdictional rates would be subject to FERC review under § 205 of the FPA (16 U.S.C. § 824d). We are not suggesting that any wholesale sales subject to FERC jurisdiction would occur at anything other than the FERC-authorized rate.

²³ As explained in greater detail below, the proposed structure for regulating GHG emissions does not prevent anyone from selling electricity into the California market, rather it requires that, at a later date, sufficient allowances be surrendered or other compliance shown.

²⁴ Indeed, AB 32 addresses GHG emissions generally, and ARB's regulations therefore will address other industries and activities outside the electricity and natural gas sectors.

²⁵ Under a different portion of the FPA, dealing with the Regulation of the Development of Water Power and Resources (16 U.S.C. § 791, et seq.), and not at issue here, FERC does regulate the environmental impact of hydroelectric projects on fish and wildlife.

²⁶ In any event, FERC previously concluded that a generator with a FERC-required must-run obligation would be excused from that obligation where a pollution control requirement prevented the generating plant from operating. ("Order Granting Emergency Motion Clarification," San Diego Gas & Electric Company v. Sellers of Energy and Ancillary Service Into Markets Operated by the California Independent System Operator Corporation and the California Power Exchange, Docket No. EL00-95-039 96 FERC ¶ 61, 117 at 61, 446- 8, July 25, 2001.)