BILL ANALYSIS �
SB 1535
SENATE COMMITTEE ON ENVIRONMENTAL QUALITY
Senator S. Joseph Simitian, Chairman
2011-2012 Regular Session
BILL NO: SB 1535
AUTHOR: Padilla
AMENDED: April 25, 2012
FISCAL: Yes HEARING DATE: May 14, 2012
URGENCY: Yes CONSULTANT: Peter Cowan
SUBJECT : CALIFORNIA GLOBAL WARMING SOLUTIONS ACT:
PUBLICALLY OWNED WATER UTILITIES
SUMMARY :
Existing law , under the California Global Warming Solutions
Act of 2006 (CGWSA):
1) Requires the California Air Resources Board (ARB) to
determine the 1990 statewide greenhouse gas (GHG) emissions
level and approve a statewide GHG emissions limit that is
equivalent to that level, to be achieved by 2020, and to
adopt GHG emission reduction measures by regulation, and
sets certain requirements in adopting the regulations. ARB
may include the use of market-based mechanisms to comply
with these regulations. (Health and Safety Code �38500 et
seq.).
2) Requires ARB to prepare and approve a scoping plan by
January 1, 2009, for achieving the maximum technologically
feasible and cost-effective reductions in GHG emissions
from sources or categories of sources of GHGs by 2020. ARB
must evaluate the total potential costs and total potential
economic and noneconomic benefits of the plan for reducing
GHGs to the state's economy and public health, using the
best economic models, emission estimation techniques, and
other scientific methods. The plan must be updated at least
once every five years. (�38561).
3) Specifies that ARB is not conferred authority to alter any
programs administered by other state agencies for the
reduction of GHG emissions. (�38574).
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This bill :
1) Makes legislative findings and declarations related to:
a) The CGWSA and the adoption of a market-based
mechanism for reduction of GHG emissions (cap-and-trade)
and the extent to which the board has subsequently
addressed the impacts on the water industry.
b) The Legislature directing ARB to evaluate benefits
achieved through specific water sector measures in lieu
of regulating the water industry under cap-and-trade.
2) Provides that ARB is also not conferred authority to impose
regulatory obligations on publicly owned water utilities
for purposes of GHG emissions related to electricity
imported for the publicly owned water utility's own use for
the sole purpose of obtaining, transporting, and
distributing water to its service area from an out-of-state
water source. (�38574).
3) Specifies that the provisions of #2 above and Existing Law
#3 do not apply if ARB allocates to the allowances,
credits, or other forms of price mitigation received by
publicly owned electric utilities.
COMMENTS :
1) Purpose of Bill . According to the author, ARB has included
various water districts, including Metropolitan Water
District of Southern California (MWD), as "electrical
marketers" due to their importation of out-of-state
electricity use for the pumping of water. This designation
will require these districts to comply with cap-and-trade.
In contrast to publically owned electric utilities, water
districts (whether public or private) have not been
allocated any allowances for compliance with cap-and-trade.
MWD estimates that purchasing the necessary allowances
could cost as much as $50 million in 2020, and without an
allocation of allowances, would result in consumer rate
increases. The author notes that in the resolution to adopt
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the cap-and-trade regulation ARB directed its executive
officer to continue discussions regarding the
"�d]istribution of allowance value associated with
cap-and-trade compliance costs from using electricity to
supply water, and the expected ability of allowance
allocation and other measures to adequately address the
incidence of these costs equitably across regions of the
State." According to the author SB 1535 "would codify this
requirement into law and ensure that these water districts
have the ability to comply with �CGWSA]."
2) Brief background on cap-and-trade . The adopted
cap-and-trade regulation imposes a cap on the aggregate GHG
emissions allowed from "capped sectors." The entities
covered within these sectors constitute approximately 85%
of all statewide GHG emissions. Each year the cap
declines, thus resulting in a reduction in GHG emissions
over time. To comply with the cap, covered entities must
surrender to the state a number of "compliance instruments"
equal to the amount of their GHG emissions, as expressed in
the equivalent metric tons of CO2. The regulations
describe two types of compliance instruments: 1) an
"allowance" to emit GHGs, all of which are generated by the
state in an amount equal to the cap and; 2) an "offset"
resulting from an emissions reduction achieved in an
uncapped sector and generated by third party pursuant to a
protocol adopted by ARB.
Under the cap-and-trade regulation many of the allowances
are freely allocated to the covered entities, some are held
in a price containment reserve, and the remainder
auctioned. Allowances received or purchased can be traded,
thus creating an emissions market which according to ARB
minimizes compliance costs and encourages businesses to
invest in GHG emissions reductions. ARB plans to hold
auctions quarterly starting in November 2012.
As described in the ARB 2008 CGWSA Scoping Plan,
cap-and-trade acts as an umbrella measure to achieve GHG
reductions additional to and in conjunction with other
regulations adopted pursuant to the act, not as an
alternative to, or separate from those other regulations.
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3) Allowance Allocations . When ARB adopted the cap-and-trade
regulation it also made allocations of allowances at no
cost to two sectors, the industrial sector and the
electricity sector. The industrial sector allocations are
based, in part, on a covered entity's risk for "leakage,"
which is the increased GHG emissions or decreased GHG
removals resulting from the displacement of those
industrial activities. Within the electricity sector only
distribution utilities, including investor owned utilities
(IOUs) and publically owned utilities (POUs) received
allocations. IOUs are required to consign for auction the
entire allocation. The revenues from these auctions are
then returned to the IOUs to be used for ratepayer benefit
in accordance with an ongoing rulemaking at the Public
Utilities Commission (PUC). POUs while not required to
consign allowances to auction or be subject to PUC
rulemaking are required under the cap-and-trade regulation
to use those allowances exclusively for ratepayer benefit.
No free allowances are allocated to any electricity
importer or generator that is not a distribution utility.
4) Water and GHG Emissions . In the CGWSA 2008 scoping plan,
ARB estimates that one-fifth of the electricity and
one-third of the non-power plant natural gas consumed in
the state are associated with water delivery, treatment and
use. The scoping plan also identified six GHG emission
reduction measures for the water sector, including water
use efficiency and water system energy efficiency. No
reductions from these measures were included in the
proposed measures for meeting the 2020 GHG limit, and there
is no current rulemaking associated with these or other
water sector GHG measures. Increases in system or use
efficiency reduce the energy demand from water systems and
thus they would also reduce any compliance obligation
associated with that energy under cap-and-trade.
5) Colorado River Aqueduct Associated GHG Emissions . The
Colorado River Aqueduct (CRA) operated by MWD imports water
from the Colorado River and is capable of providing up to
1.25 million acre feet of water to Southern California. In
order to convey this water, substantial electricity is
required to operate five sets of pumps. According to MWD,
in a typical year the bulk of this electricity is provided
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by hydroelectricity that has no compliance obligation under
the cap-and-trade program. Additional electricity is
provided via contract with a distribution utility and the
compliance obligation associated with it belongs to either
the original importer or generator, not MWD and is
presumably included in the contracted price. According to
MWD, in years when larger amounts of water are imported
through the CRA, it purchases power at market and imports
it for use at the pumping stations. Under the
cap-and-trade regulation this makes MWD the "first
deliverer" of that electricity and thus responsible for the
compliance obligation associated with GHG emission from its
generation.
6) Exempting Water Imports . SB 1535 would, unless ARB provides
allowances or other forms of price mitigation to all public
water utilities, exempt only emissions associated with
importing out-of-state water. However, water importation
represents only a portion of the GHG emissions associated
with water conveyance. Is it appropriate to exempt this
emission source? Does doing so provide an unintended
incentive to make greater purchases of market electricity
which would not contain a carbon price signal rather than
to continue to contract for power which does contain this
price signal?
7) Effect on the Cap-and-Trade Program . A full exemption
would reduce the incentives to lower the use of that GHG
emissions source, in this case imported electricity.
However, under CGWSA the state is still required to achieve
a 2020 limit for GHG emissions. Because an exemption
shrinks the total pool of GHG emissions under
cap-and-trade, but the overall required reduction remains
the same, those remaining in the cap-and-trade program must
make up any short fall resulting from the exemption.
Should the exemption result in increased GHG emissions, it
could necessitate even further reductions from non-exempt
entities.
Granting new allocations of allowances, credits or other
forms of price mitigation decreases incentives for
emissions reductions among all market participants, but
particularly those receiving them. In the allocation of
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allowances or other forms of price mitigation it would be
important to ensure that any value associated with those is
used exclusively for ratepayer benefit, in a fashion that
retains as much carbon price signal as possible. Who would
ensure that allowances, credits or other forms of price
mitigation are used for ratepayer benefit or determine what
forms of ratepayer benefit should they be used for? SB
1535 does not address these issues, nor does the bill
provide guidance to ARB on how those allowances, credits,
or forms of price mitigation should be allocated, or what
types of benefit they could be used for.
8) Outstanding Issues . If the Committee feels the bill is
necessary it should be amended to clarify that ARB does not
have authority to alter programs by other state agencies if
an allocation of allowances, credits or other forms of
price mitigation is made to publicly owned water utilities.
SOURCE : Metropolitan Water District of Southern
California
SUPPORT : Eastern Municipal Water District, Long Beach
Water Department, San Diego County Water
Authority
OPPOSITION : None on file.