California Governor Signs S.B. 350 into Law, Increasing RPS to 50 Percent by 2030 

On October 7, 2015, California Governor Jerry Brown signed S.B. 350, the Clean Energy and Pollution Reduction Act of 2015, into law. The bill increases California's Renewable Portfolio Standard ("RPS") from 33 percent by 2020 to 50 percent by 2030 and doubles energy efficiency standards by 2030. S.B. 350 follows Governor Brown's January 5, 2015 inaugural address, wherein he announced the renewable energy and efficiency targets that S.B. 350 embodies. 

Like California's original RPS, established in 2002, S.B. 350 will be implemented jointly by the California Public Utilities Commission ("CPUC") and the California Energy Commission ("CEC"). S.B. 350 requires each investor-owned utility to submit renewable energy resource procurement plans setting forth strategies for procuring and integrating reliable, renewable energy into the grid, and requires the use of zero carbon-emitting resources to the "maximum extent reasonable." The procurement plans will be reviewed and adopted by the CPUC as part of, and pursuant to, the general procurement plan process. The law also establishes interim renewable energy targets of 40 percent by the end of 2024 and 45 percent by the end of 2027. S.B. 350 does not alter the categories of resources that count toward compliance with the RPS.

S.B. 350 also requires a 50 percent increase in energy efficiency for existing residential and nonresidential buildings by 2030. The law directs the CEC to establish energy efficiency targets and specify programs that will be utilized to meet the 2030 energy efficiency goal. The bill also directs publicly owned utilities to meet energy efficiency targets specified by the CEC.

As initially introduced, S.B. 350 called for a 50 percent reduction in petroleum use from cars and trucks. The 50 percent petroleum reduction standard, however, was not included in the version of the bill ultimately approved by Governor Brown.

Federal Court Largely Dismisses Claims Challenging Constitutionality of Low Carbon Fuel Standard  

On August 13, 2015, the Eastern District of California issued an order largely dismissing claims challenging the constitutionality of California's Low Carbon Fuel Standard ("LCFS").Am. Fuels & Petrochemical Mfrs. Ass'n v. Corey, 2015 U.S. Dist. LEXIS 106901 (E.D. Cal. Aug. 13, 2015). The order follows a Ninth Circuit decision affirming the district court's earlier conclusion that the crude oil provisions of the LCFS do not facially discriminate against out-of-state commerce but reversing its conclusion that the LCFS was enacted for an improper purpose (i.e., economic protectionism) and had a discriminatory effect on out-of-state crude oil. The Ninth Circuit also reversed the district court's determination that the LCFS constituted an extraterritorial regulation and remanded to the district court to determine whether the ethanol provisions of the LCFS have the purpose or effect of discriminating against interstate commerce.

On remand, as ordered by the Ninth Circuit, the Eastern District granted defendants' motion for partial summary judgment on plaintiffs' claim that the LCFS is an impermissible extraterritorial regulation. Additionally, the court granted summary judgment for defendants regarding the crude oil provisions of the LCFS, holding that the Ninth Circuit already decided that the provisions are not discriminatory facially, purposefully, or in effect. The Eastern District also granted summary judgment for defendants on plaintiffs' claim that the ethanol provisions of the LCFS are facially discriminatory.

With regard to whether the ethanol provisions of the LCFS discriminate in purpose or effect, the court rejected defendants' argument that plaintiffs had "disavowed" their claims when they moved for summary judgment on only some of their discrimination claims. The court found that there was no indication that plaintiffs abandoned or disavowed their ethanol provision claims and, therefore, denied defendants' motion to dismiss. Thus, for now, the issue of whether the LCFS's ethanol provisions discriminate in purpose or effect remains pending before the court.

Finally, the court considered plaintiffs' argument that the crude oil provisions of theamended LCFS discriminate in favor of California crude oils by assigning them an artificially low deficit relative to out-of-state fuels (i.e., the amount by which a fuel's carbon intensity exceeds an average annual carbon intensity value). The court held that the amended LCFS was not implemented for a discriminatory purpose because, like the original LCFS upheld by the Ninth Circuit as nondiscriminatory, the amended LCFS was implemented for the purpose of reducing dependency on petroleum and stimulating the production and use of low-carbon fuels in California. Additionally, the court held that because the crude oil provisions of the amended LCFS benefit and burden both California and out-of-state interests alike, the provisions do not have an impermissible discriminatory effect on interstate or foreign commerce. The court, therefore, granted defendants' motion to dismiss plaintiffs' claims that the crude oil provisions of the amended LCFS discriminate in purpose and effect.

Clean Power Plan Renewable Energy Incentives  

The Clean Power Plan ("CPP") allows states to select either an emission standards plan—implementing either rate-based or mass-based emission standards for affected electric generating units ("EGUs")—or a state measures plan, under which the state's mass-basedCO2 emission goal serves as the metric for demonstrating plan performance. Under both plans, renewable energy will play an important role in helping states to achieve compliance. However, the incentives for development of renewable energy are different under the various approaches due to the different units and measures traded under the plan types.

Generation from renewable energy deployed to comply with a rate-based plan is "credited" as an emission reduction credit ("ERCs") under an credit issuance system. These credits can then be traded among affected EGUs within a state or within another state implementing a compatible ERC accounting system. Under a rate-based approach, newly installed renewable energy sources like new wind capacity count toward compliance with the state's regulatory obligations for the CPP by the state's issuance of ERCs for quantified and verified megawatt hours ("MWhs") of generation deployed after 2022. The MWh accounting method allows states to engage in a crediting system that is not dependent on the rate-based goals of individual states or the specific emission rate standards that states may apply.

In a mass-based approach under either an emission standards plan or a state measures plan, MWhs of generation from renewable energy sources are not "credited" and traded to meet compliance obligations. The unit traded under a mass-based program is a uniform COallowance. The incentive to deploy renewable energy exists to the extent that renewable generation displaces fossil generation at existing sources, not to the extent that ERCs are generated. Thus, generation from renewable energy implemented for compliance with mass-based goals does not need to be implemented after 2022 and does not require evaluation, measurement, and verification.

Only in limited circumstances under a mass-based system will such recordkeeping be necessary as renewable energy implemented in a mass-based state "automatically counts" toward compliance. First, if renewable generation takes place in a mass-based state and there is a demonstration that the generation was delivered to meet the load of a state with a rate-based plan, the renewable generation will be eligible for generating ERCs and subject to crediting requirements. Second, if a mass-based state is an early actor implementing renewable energy projects under the Clean Energy Incentive Program prior to September 2018, a mass-based state may set aside allowances from the CO emission budget it establishes for the interim plan performance period and allocate these allowances to eligible renewable energy projects for the MWhs those projects generate in 2020 and/or 2021. In both of these circumstances, renewable energy would not be automatically counted toward compliance and would require appropriate verification.

As a result of this difference in direct trading of zero-emitting generation under a rate-based program and trading of COallowances under a mass-based program, there appears to be less of a direct incentive to implement renewable generation in mass-based states. Nevertheless, the "automatic counting" of renewable energy in a mass-based system will presumably serve as an incentive for development of renewable energy sources in mass-based states.

Proposed Methane Emission Regulations for Oil and Gas Industry New Sources 

On September 18, 2015, the EPA published in the Federal Register a proposed rule to amend the new, modified, and reconstructed source performance standards ("NSPS") for the oil and natural gas category to include standards for methane emissions. The proposed rule adopts the same best system of emission reduction for methane that is currently in place for volatile organic compounds ("VOCs") under the finalized 2012 NSPS. In addition, the proposed rule applies the methane and VOC emission limits to "downstream" sources currently unregulated under the NSPS and requires that new, modified, and reconstructed well sites and compressor stations conduct fugitive emission surveys and repair any sources of fugitive emissions found within 15 days. The requirements of the proposed rule and its potential industry and environmental implications are discussed in greater detail here.

Although both industry and environmental groups recognize the value of reducing methane emissions, the reactions to the proposed rule predictably have been mixed. In a series of public hearings held in Denver and Dallas, representatives from the American Petroleum Institute ("API")—a trade association representing the oil and gas industry—asserted that the industry already works to reduce methane emissions in a cost-effective manner due to free-market measures and industry innovation incentives. According to the API, these additional methane regulations would be both "duplicative and costly" and potentially could lead to higher energy costs for consumers.

At the same time, some environmentalist groups have criticized the proposed rule as "low hanging fruit" because the technological equipment necessary to comply is both available and affordable. According to a representative from the Environmental Defense Fund, compliance with the rule is "not hard" and would not require the oil and gas industry to make major adjustments in their operations. For these groups, the preferred target for regulation is existing or abandoned operations, which a Natural Resources Defense Council representative claims is the largest source of methane emissions.

While the proposed rule describes the preferred compliance technologies in great detail, the EPA solicits comments on a wide array of alternative technologies, detection and monitoring capabilities, and "next generation" compliance verification via independent third-parties. Similar to the 2012 NSPS, the numerous and varied solicitations for comment potentially foreshadows the EPA's approach to future regulations. Indeed, simultaneous to the proposed rule, the EPA issued nonbinding recommendations for reducing VOC and methane emissions from existing equipment and processes, effectively providing the framework for the future regulation of existing sources. Comments submitted to this proposed rule, therefore, similarly should anticipate subsequent rounds of regulation pertaining to oil and gas industry emission standards and regulatory enforcement.

The comment period for the Proposed Rule closes on December 4, 2015.