What’s Happening In California
[October 2006]

California Governor Arnold Schwarzenegger recently signed a suite of energy-related bills making California the first state to enact legislation specifically intended to limit greenhouse gas (GHG) emissions. The Global Warming Solutions Act of 2006, AB 32, requires the state to reduce GHG emissions to “1990 levels” by 2020. Other notable energy-related bills the Governor signed include: (i) SB 1368, which prohibits the state’s investor-owned utilities (IOUs) and municipal utilities from executing power purchase agreements for baseload generation with terms exceeding five years, unless the generating facility meets established GHG performance standards; and (ii) SB 107, which codifies the acceleration of California’s Renewable Portfolio Standard (RPS) to require 20 percent of electric sales by retail electric sellers (excluding municipal utilities) to be from renewable energy resources by 2010, rather than by 2017. Each Act becomes effective as of January 1, 2007.

The cumulative effect of these Acts will be to place a premium on infrastructure investments that can abate GHG emissions. Accordingly, increased investments in renewable non-emitting power are an anticipated outcome. Critics suggest, however, that such GHG measures may be too costly, drive businesses further out of the state, and promote investment decisions based on short-term considerations.

AB 32 requires a reduction in GHG emissions to “1990 levels” by 2020, with mandatory caps set to begin in 2012. The Act charges the California Air Resources Board (CARB) with the responsibility to develop, implement, and enforce regulations related to GHG reporting, limits, and reductions (including GHG emissions from electrical generation). By January 2008, CARB must quantify the GHG levels “existing” in the state as of 1990 and adopt reporting and verification regulations of statewide GHG emissions. By January 2011, CARB must adopt regulations addressing GHG emission limits and emission reduction measures to “achieve the maximum technologically feasible and cost-effective reductions in [GHG] emissions.” The Act authorizes CARB to incorporate “market-based compliance mechanisms” into a GHG regulatory program, including GHG exchanges, banking, and credits. AB 32 does allow CARB to defer imposition of GHG limits in the event of “extraordinary circumstances, catastrophic events, or threat of significant economic harm.”

SB 1368 prohibits IOUs and municipal utilities distributing power to retail customers from entering long-term financial commitments, including entering or renewing power purchase agreements for baseload generation for five years or longer, unless the generating facility has emission levels that do not exceed the rate of GHG emissions for a combined-cycle natural gas baseload plant. The California Public Utilities Commission (CPUC) must adopt GHG performance standards for baseload generation of IOUs. The California Energy Commission (CEC) must adopt similar standards for municipal utilities. SB 1368 allows any combined-cycle natural gas power plants in operation, or those that have a final permit decision from the CEC to operate by June 30, 2007, to be deemed to be in compliance with the GHG performance standards and enter contracts of any length. In contrast, SB 1368 potentially restricts some currently-operating generators to power purchase agreements with terms of less than five years.

SB 107 codifies the acceleration of California’s RPS to require that 20 percent of electric sales by retail sellers (except for municipal utilities) are procured from “eligible renewable energy resources” by 2010. Existing California law sets 2017 as the deadline for meeting the 20 percent renewable resource target. In 2003, the CPUC accelerated the 20 percent renewable resource requirement to 2010. SB 107 codifies the CPUC’s decision to advance the deadline.

SB 107 requires municipal utilities to adopt their own renewable procurement programs. It does not subject municipal utilities to a specific renewable resource target. Instead, they must “recognize the intent of the Legislature to encourage renewable resources” but are allowed to take into account the effect of the renewable standard on their rates, reliability, and financial resources and the goal of environmental improvement. Each municipal utility must report annually to their customers and the CEC on the amount of qualified renewable energy they purchase or generate.

SB 107 seeks to clarify that certain “out-of-state” generators may qualify as an “eligible renewable energy resource,” particularly if the “out-of-state” generator commenced producing power after January 2005. Somewhat anomalously, SB 107 could potentially be construed to qualify certain out-of-state generators based on the purchaser being a California IOU regulated by the CPUC. If so, the regulatory jurisdiction of the purchaser, and not the source, or generation characteristics of the power, could emerge as a key qualifying determinant. SB 107 also instructs the CPUC to adopt “flexible rules for compliance” that must address circumstances where, as a result of insufficient transmission, an IOU is unable to procure necessary renewable resources to meet the 20 percent requirement by the 2010 deadline.

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