On Sept. 12, 2008, the California Public Utilities Commission ("CPUC") and the California Energy Commission ("CEC") released their joint proposed opinion on strategies to help reduce greenhouse gas ("GHG") emissions and meet the goals of AB 32, the California Global Warming Solutions Act of 2006. The Proposed Final Opinion on Greenhouse Gas Regulatory Strategies, prepared jointly by CPUC President Michael Peevey, and CEC Chairman Jackalyne Pfannenstiel and CEC Commissioner Jeffrey Byron, provides recommendations, and outlines a variety of options for the California Air Resources Board ("CARB") to consider in deciding how to design a program to achieve the GHG emission targets in the electricity sector. After public comments, the full CPUC and the full CEC will individually consider adopting the finalized opinion at their respective meetings Oct. 16, 2008.

An "Interim Opinion," adopted in March 2008 by the two Commissions, recommended aggressive regulatory measures that maximize energy efficiency and expand renewable energy development beyond the 20 percent goal, and consideration of a multi-sector cap-and-trade program to capture additional costeffective reductions of GHG emissions. The Interim Opinion also recommended that the "deliverers" of electricity to the California grid would be responsible for complying with the AB 32 regulations.

Currently, the electricity sector accounts for 25 percent of California's GHG emissions. The CARB's Climate Change Draft Scoping Plan expects that the electricity industry will contribute at least 40 percent of the total GHG reductions from direct mandatory approaches and measures. With the addition of a potential cap-andtrade program, the electricity sector may be called upon to reduce its emissions even more. The Proposed Final Opinion describes specific mechanisms for requiring the electricity industry to meet the goals set out in the draft Scoping Plan. To achieve these ambitious cuts in GHG emissions, the Proposed Final Opinion offers recommendations and options in energy efficiency and renewable resources and combined heat and power ("CHP"), and describes a complementary cap-and-trade program. In more detail, the Proposed Final Opinion:

  • Reaffirms the commitment to pursue all of the state's cost-effective energy efficiency options and urges the expansion of renewable energy to 33 percent of energy usage for all retail providers.
  • Considers electric sector costs and rate impacts of reaching the 2020 GHG levels through more energy efficiency, greater use of renewable energy, and increased CHP, and concludes that the impacts will vary depending on service territory and on the design of the ultimate program developed by the CARB. (Staff and consultants of the Commissions developed a variety of illustrative scenarios that indicate that, unrelated to AB 32 compliance, utility rates are likely to rise above the rate of inflation because of increased capital and operating costs and load growth. Under some scenarios related to AB 32 policies, however, utility costs may be reduced compared with business as usual, after accounting for the adoption of significant energy efficiency measures by consumers.)
  • Recognizes the value of higher energy efficiency provided by CHP projects, and recommends that for larger installations (over the size-threshold adopted by CARB), the GHG emissions for electricity consumed onsite and/or delivered to the grid be included in the cap-and-trade program, and receive allowance allocations comparable to other electricity providers and consumers.
  • Identifies auctioning as the preferred method to distribute emission allowances. Starting in 2012, 80 percent of the emission permits or allowances would be distributed for free to electricity deliverers and 20 percent would be auctioned, with 100 percent auctioned by 2016.
  • Recommends that free allowances be allocated to deliverers based on energy output and electricity fuel source. (Allowances would be granted to the electricity retail providers on behalf of their customers, with the allowances offered for sale in an independent, centralized auction. These allowance allocations will change over time based on historical portfolio emissions to a sales basis by 2020, to allow transition time for retail providers with emission intensive portfolios.)
  • Proposes that auction revenues be used for AB 32-related purposes, and all revenues auctioned by the retail providers be used to support investments in renewables, efficiency, new energy technology, infrastructure, and customer bill relief.
  • Urges, in considering market structure, that the key market design feature is maintaining environmental integrity. (Market structure should encourage open and transparent allowance trading with many participants, unlimited banking of allowances and offsets, and offsets that must meet AB 32 requirements to be real and permanent. Offsets should not be limited geographically. If a multi-sector regional cap-and-trade is developed, a three-year compliance period should be established to allow time to implement emission reduction measures and to account for hydrologic conditions that can significantly impact the electricity sector.)

The development of this Proposed Final Opinion has been an open public process beginning with a joint Commission symposium in April 2007 that addressed GHG emissions and various types of possible capand- trade markets. A number of workshops have helped craft the recommendations. The Proposed Final Opinion on Greenhouse Strategies, A Summary of the Proposed Opinion, and Frequently Asked Questions are available from the Energy Commission at: http://www.energy.ca.gov/ghg_emissions/, and are also available from the California Public Utilities Commission at http://www.cpuc.ca.gov - (click "Climate Change" under "Hot Topics").