Energy Law Alert: California PUC Proposes Cap and Trade Program

On February 8, 2008, California Public Utilities Commission (PUC) President Michael Peevey issued a proposed decision concerning implementation of California's greenhouse gas emissions legislation, AB 32. The decision recommends a cap and trade program for the electricity sector in California that would impose regulations on owners and operators of generation in California and out-of-state generators delivering electricity to the California electrical grid.

Under AB 32, the California Air Resources Board (CARB) is primarily responsible for adopting the regulations required to reduce California's greenhouse gas emissions to 1990 levels by 2020. The PUC and the Energy Commission also play a role in implementing AB 32, however, and initiated a joint proceeding to produce recommendations to CARB on how to regulate the electricity and natural gas sectors in California. Once the PUC and the Energy Commission adopt those recommendations, they will be passed on to CARB for incorporation into CARB's scoping plan. Although all three agencies are working together, and any recommendations provided by the PUC and Energy Commission will be given careful consideration, CARB is not obligated to follow such recommendations.

President Peevey's proposed decision first recommends that the PUC and Energy Commission continue to implement energy efficiency improvements and efforts to increase the percentage of renewable generation in California. Currently in California, investor-owned utilities are required to obtain 20 percent of their electricity from renewable sources by 2010. Publicly owned utilities are required to adopt a plan for increasing renewable generation in their portfolios, but are not required to meet any specific standards. The proposed decision recommends that the 20 percent requirement for investor-owned utilities be increased, although it leaves for future proceedings what the increase should be. The proposed decision also recommends that publicly-owned utilities be required to obtain at least 20 percent of their electricity from renewable sources by a date certain.

The proposed decision recommends that a multisector cap and trade program be developed in California that would include the electricity sector. According to the decision, a cap and trade program will allow further greenhouse gas emissions reductions beyond those achieved by mandatory reductions and at a lower cost, encourage investment in technical innovation and new technologies, and allow market participants to better manage risks. The natural gas sector, however, should not be included in the cap and trade program at this time. Among other reasons, the decision contends that there are fewer options for greenhouse gas emissions reductions in the natural gas sector as compared to the electricity sector, and that energy efficiency programs are the best option for reducing greenhouse gas emissions in the natural gas sector.

The proposed decision recommends that the "point of regulation" for the cap and trade program should be what it refers to as the "deliverer" of the electricity. The PUC and Energy Commission have been evaluating whether greenhouse gas emissions regulations in the electricity sector should be "load-based," meaning that utilities would be responsible for showing compliance with greenhouse gas emissions reduction regulations, or "source-based", meaning that generators and those importing power into California (the "deliverer") would be required to show compliance. The decision recommends the source-based approach, arguing, among other things, that such an approach will be easier to integrate with regional or federal cap and trade programs when those are developed. Under the "deliverer" option, owners and operators of generation in California would be required to show compliance, as would those first delivering power to the California grid from out of state. The only exception would be multi jurisdictional electric utilities, which would be regulated under a load-based approach.

The proposed decision makes recommendations concerning the allocation of greenhouse gas emissions allowances under the cap and trade program. It recommends that at least some allowances be auctioned rather than allocated administratively, and that at least some of the proceeds from the auction of allowances be used to benefit electricity customers by minimizing the cost of greenhouse gas emissions reductions to consumers.

The PUC and the Energy Commission will receive comments on the proposed decision and will then vote on it. If approved, the decision will be forwarded to CARB, which will make the final decision on how to implement AB 32.

For more information on greenhouse gas emissions regulation and AB 32 implementation, please contact:

Seth D. Hilton at or (415) 617-8943
Thomas R. Wood at or (503) 294-9396

This is a publication of Stoel Rives' Energy Group for the benefit and information of clients and friends. This bulletin is not legal advice or a legal opinion on specific facts or circumstances. The contents are intended for information purposes only. This email may be deemed a solicitation or advertisement under federal law. Copyright 2008, Stoel Rives LLP.

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