In California's Cap-and-Trade Program, Utilities Benefit

The state's utilities have been placed in a special class that effectively cushions companies and their ratepayers from the cost of reducing carbon emissions.
by | December 20, 2012

Most businesses say California's new cap-and-trade program, designed to curb greenhouse gas emissions, is a job killer that will suck billions of dollars out of the economy.

But you won't hear too many protests from some of the biggest businesses of all: California's electric utilities.

From SMUD to Southern California Edison, the state's utilities have been placed in a special class that effectively cushions companies and their ratepayers from the cost of reducing carbon emissions.

"It will hold their rates neutral," said Scott Murtishaw, an energy adviser at the Public Utilities Commission.

Customers of the Sacramento Municipal Utility District shouldn't expect higher costs from the cap-and-trade program "for at least five years," said SMUD spokeswoman Dace Udris.

Ratepayers of the investor-owned utilities, such as Pacific Gas and Electric Co., will even get a small "climate dividend" under a mechanism that's expected to be ratified today by the PUC. It could be as much as $30 every six months, but the amount will really depend on the market price of carbon, Murtishaw said. It will come in the form of a rebate.

The dividend is in addition to rate stabilization. It is supposed to help compensate California consumers for the higher costs they'll be paying for other goods as a result of cap and trade, Murtishaw said.

By contrast, most industries subject to the cap-and-trade program say the carbon restrictions will cost them plenty -- more than $1 billion a year. The California Chamber of Commerce is suing to dismantle the whole enterprise, saying it's an unconstitutional tax.

Utilities, though, say they're comfortable with cap and trade.

"We think this is the right thing to do," Brad Neff, manager of cap-and-trade implementation at PG&E, said in a recent interview.

Why the special treatment for utilities and their customers? The answer lies in AB 32, the state's landmark climate-change bill, which requires Californians to reduce greenhouse gas emissions to 1990 levels by 2020.

Enacted just five years after the energy crisis, the law says utilities should be spared "duplicative" regulations.

Already, electric companies and their customers are bearing the cost of using more solar, wind and other renewable energy sources, which are generally more expensive than traditional sources. Fully one-third of their power must come from renewables by 2020.

State officials "feel like they're already getting a lot out of electricity," said Dallas Burtraw, an energy economist with the Washington think tank Resources for the Future. "The electricity sector is already out front."

The cap-and-trade market was designed by the California Air Resources Board, and the agency opted to be gentle with a group that is essentially a captive audience.

"Ratepayers can't shop around," said agency spokesman David Clegern. "This is a way of giving them some relief."

Buffering ratepayers from higher costs is a little unsettling to economists and some environmentalists, who argue that price signals are the most effective way to spark conservation.

But keeping costs low is seen as an effort by state regulators to make the controversial program more palatable to Californians. The program has already survived a failed 2010 ballot initiative that would have overturned AB 32.

"The program was not meant to put people out of business or put families in jeopardy," said Tim O'Connor, director of the California climate initiative at the Environmental Defense Fund. "(The cost) can't be too high or you quickly lose the public." Cap and trade is an attempt to inject market forces into the fight against global warming.

The state has placed a ceiling on the amount of carbon that can be emitted by more than 400 manufacturers and other big companies; the cap will decline slightly each year.

The state wants companies to reduce emissions as much as they can, perhaps by investing in green technologies. Otherwise, if they need emissions allowances they'll have to buy them from the state or on the open market. The point is, there's now a price for carbon pollution -- it was trading Wednesday at $13.75 a ton.

Most companies get 90 percent of their emissions allowances for free, from the state, and have to buy the rest. The first state-run auction was held in November and raised around $290 million; another is set for February.

The mechanism has brought protests from business groups, which say the cost for emissions credits will run upward of $1 billion a year. It's the reason the California Chamber is suing the state. Electric utilities aren't exempt from cap and trade. They have to keep their emissions below a certain threshhold, just like everyone else.

But unlike cement-makers, refiners and other industries, they're getting all of their emissions allowances doled out for free. As a result, state officials believe there will be no impact on their rates from cap and trade.

For a utility like SMUD, which has an abundance of hydroelectricity and renewable energy and doesn't rely heavily on carbon-emitting fossil fuel plants, the result is a surplus of emissions allowances.

"We're below the emissions cap," Udris said. "We have the credits we can sell. We won't be buying."

The state set up a complicated mechanism to deal with investor-owned utilities like PG&E. The system is designed to ensure there is a healthy market with lots of allowances for sale.

The utilities get all of their allowances for free -- but are required to sell them off. Indeed, most of the allowances sold at the state's inaugural auction in November belonged to them.

It doesn't end there. They then have to purchase whatever allowances they need to comply with the emissions ceiling. The revenue they get from selling their free credits is supposed to offset their costs.

The revenue must go to ratepayers -- 85 percent to residential customers and the rest to businesses -- to hold down rates.

"This will be a full buy-down of their costs," said Murtishaw of the PUC.

(c)2012 The Sacramento Bee (Sacramento, Calif.)


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