1. California Public Utilities Commission Why a Load-Based Emissions Cap for California? Julie Fitch CPUC Director of Strategic Planning April 19, 2007 Presentation to Symposium on Linking GHG Cap and Trade Systems

2. California Public Utilities Commission 2 Load-Based: What and Why What is it? –A firm cap on emissions (just like conventional source cap) –Capped entities are load-serving entities instead of generators –Still requires emissions reporting and tracking by source –Emissions are then attributed to load-serving entities (utilities and other service providers) based on energy delivered to consumers (aka retail sales) –Can be linked with other source-based sectors and systems (AB 32, RGGI, EU ETS) –It’s a carbon portfolio requirement for LSEs = “carbon budget”

3. California Public Utilities Commission 3 Why choose load-based? 1.Builds on portfolio role of LSEs – carbon budget disciplines LSEs to capture economic tradeoffs among end-use efficiency, distribution efficiency, renewables, and conventional supply choices –Promotes efficiency better than generator cap –LSEs deliver end-use efficiency, generation does not 2.Captures imports (required by AB 32) 3.May cost power consumers less for the same attainment (has not been tested)

4. California Public Utilities Commission 4 Some History Energy Action Plan* of CPUC and CEC (May 2003) includes concept of “loading order” –Energy efficiency and demand response –Renewables, including distributed –Conventional generation Procurement proceeding of 2004 –Continuation of proceeding that returned utilities to power-buying business post-energy-crisis –Took up issue of how to incentivize utilities to invest properly in “loading order” *The EAP can be found at: www.cpuc.ca.gov/PUBLISHED/REPORT/28715.htm

5. California Public Utilities Commission 5 Evolution of “Procurement Incentive Framework” Staff realized that greenhouse gas emissions could be a unifying framework for a utility procurement risk/reward mechanism or “procurement incentive framework” Original staff proposal (issued April 2004) referred to as “Sky Trust” proposal – contemplated auctioning allowances to pay for additional energy efficiency and renewables investment Held series of workshops March 2005; staff modified proposal to suggest a load-based GHG cap instead of “Sky Trust” (in response to workshop comments) Governor announced GHG targets in Executive Order in June 2005

6. California Public Utilities Commission 6 Load-Based Cap Decision February 2006 Decision* adopted load-based GHG emissions cap as the unifying framework for utility procurement incentives Decision made initial policy calls on some implementation issues –Emissions allowances based on “tons of CO2 equivalent”, and over time to include all six major GHGs –Cap will include provisions for lowering GHG emissions over time relative to a baseline –Baseline will be established on a historical year basis, with 1990 as the preference year to comport with Kyoto and the Governor’s GHG targets –Emissions allowances to be allocated administratively (not necessarily grandfathered) –Flexible compliance to be allowed (details to be worked out), based on verifiable and feasible reductions –Preference for allowing alternative compliance payments, as well as sales of excess allowances for shareholder profit *Decision is posted at www.cpuc.ca.gov/word_pdf/FINAL_DECISION/53720.doc

7. California Public Utilities Commission 7 Regulatory and Market-Based Solutions Regulatory Renewables Portfolio Standard Energy Efficiency Environmental Risk Adder Emissions Performance Standard Market-based Load-based GHG emissions cap

8. California Public Utilities Commission 8 Interaction of Cap with Other Policy Initiatives Emissions Reductions Time Mandatory RPS Mandatory EE Programs Current System Initial GHG CapGHG Cap Ratchet Mandatory RPS Mandatory EE Programs Additional EE Portfolio mgt – clean power Mandatory RPS Mandatory EE Programs Additional EE Portfolio mgt & clean power Buy CCS Buy repower Total GHG emissions reductions More EE

9. California Public Utilities Commission 9 Climate and Procurement Policy Integration Load-based cap approach more effective at integrating energy efficiency into climate efforts –Focus on generation sources alone would make efficiency investments exogenous to the GHG cap structure Same logic is true for renewables and other “loading order” resources

10. California Public Utilities Commission 10 Implications of Load-Based GHG Cap for Resource Choices LSEs are portfolio managers –GHG emissions are added to direct financial cost in assembling the portfolio –Load-serving entities can readily make tradeoffs and cost-effective choices among resource options Load Based cap is not just a planning “adder” –Quantitative cap, not % performance standard –Choices have costs in the LSE’s carbon budget –Efficiency and clean resources deliver financial savings to LSEs

11. California Public Utilities Commission 11 Current Greenhouse Gas Proceeding Opened April 2006 Phase 1: Adoption of Emissions Performance Standard –Began April 2006 to be implemented by end of 2006 –SB 1368 signed September 2006; required slight modifications to CPUC staff recommendation –EPS adopted January 25, 2007 Phase 2: Implementation of Load-Based Cap –Was to begin September 2006 –AB 32 signed September 2006 –CPUC delayed starting Phase 2 to coordinate with CARB

12. California Public Utilities Commission 12 AB32 Requirements AB 32, now codified as Section 38505 of the Health and Safety Code, contains the following definition: (m) “Statewide greenhouse gas emissions” means the total annual emissions of greenhouse gases in the state, including all emissions of greenhouse gases from the generation of electricity delivered to and consumed in California, accounting for transmission and distribution line losses, whether the electricity is generated in state or imported. Statewide emissions shall be expressed in tons of carbon dioxide equivalents.

13. California Public Utilities Commission 13 California’s Electricity-Related Greenhouse Gas Emissions Source: CA Energy Commission Emissions Inventory

14. California Public Utilities Commission 14 Two Options (maybe…) 1. Load-Based cap on all electricity sector emissions (in-state and imported) 2. Hybrid system with source-based cap on in- state generation and load-based approach to cover imports –Has various incarnations –Potentially serious concerns about legality

15. California Public Utilities Commission 15 Bottom Line Perfect system has not yet been designed Think multiple designs can work as long as systems have: –Environmental integrity –Common currency CPUC interest in trying a different model that works for California

16. California Public Utilities Commission 16 Contact information Julie Fitch Director, Division of Strategic Planning California Public Utilities Commission Phone (415) 355-5552 Email: jf2@cpuc.ca.gov