HomeMy WebLinkAboutFinal-Staff-Report-3342_Policy-for-Use-of-GHG-Cap-and-Trade-Revenue
City of Palo Alto (ID # 3342)
City Council Staff Report
Report Type: Consent Calendar Meeting Date: 12/10/2012
City of Palo Alto Page 1
Summary Title: Policy for Use of GHG Cap-and-Trade Revenue
Title: Finance Committee Recommendation to Adopt a Resolution Approving
the Cap-and-Trade Revenue Utilization Policy for the Use of Revenues from
the Sale of Allocated Allowances in California’s Greenhouse Gas Cap-and-
Trade Auctions
From: City Manager
Lead Department: Utilities
Recommendation
Staff, the Utilities Advisory Commission (UAC) and the Finance Committee recommend that the
City Council adopt the attached resolution approving the Cap-and-Trade Revenue Utilization
Policy, a policy for the use of revenues from the sale of allocated allowances in California’s
greenhouse gas (GHG) cap-and-trade auctions.
Executive Summary
The California Air Resources Board’s (CARB’s) implementation of a cap-and-trade program,
aimed at reducing California’s GHG emissions, started November 2012. As an electric
distribution company, the City of Palo Alto Utilities (CPAU) has been allocated GHG emission
allowances free of charge by CARB. These allocated allowances are estimated to have a market
value of $3.5 to $5 million dollars in 2013 and are expected to increase in value through 2020.
Under the terms of CARB’s cap-and-trade regulation, CPAU is required to sell these allowances
in the auctions conducted by CARB and utilize the auction sale proceeds exclusively for the
benefit of retail electric ratepayers and consistent with the goals of AB 32, California’s Global
Warming Solutions Act.
The UAC, at its October 3, 2012 meeting, and the Finance Committee, at its November 14, 2012
meeting, reviewed and unanimously voted to recommend staff’s proposal for a policy that is
consistent with the regulation and minimizes any risk of future CARB action to rescind CPAU’s
allowances or disallow funding of specific projects. The key points in the policy, which is
provided in Attachment B, include:
City of Palo Alto Page 2
Set up a separate account or reserve to track auction revenues.
Abide by CARB’s regulations by using auction proceeds and allowance value obtained by
an electrical distribution utility for the exclusive benefit of retail ratepayers, consistent
with the goals of AB 32, and not use the allowances for the benefit of entities or persons
other than such ratepayers. The policy lists the following allowable uses of the auction
proceeds:
o Purchases or investment in renewable resources (outside Palo Alto or locally) for
the electric portfolio;
o Investment in energy efficiency programs for the electric portfolio and retail
customers;
o Investment in other carbon reduction activities, including those required to
achieve a carbon-neutral electric portfolio; and
o Rebate to electric retail ratepayers.
If eventually allowed by CARB, allocated allowances may be used to meet CPAU’s
compliance obligations.
Proposals for rebates to electric customers would be reviewed by Council during the
annual budget adoption process. Additionally, staff will provide annual reports to the
Council on allowance revenues and expenditures associated with complying with
regulations and this policy.
Committee Review and Recommendation
The Finance Committee reviewed the proposed Cap-and-Trade Revenue Utilization Policy at its
November 14, 2012 meeting. The staff report prepared for the Committee’s meeting (Staff
Report 3198) is provided as Attachment C to this report. The Finance Committee voted
unanimously (4-0) to recommend Council approve the proposed policy. The notes from the
Finance Committee’s November 14, 2012 meeting are provided as Attachment E.
Resource Impact
The FY 2013 budget includes revenue of $2.6 million from expected allowance proceeds.
However, the results from the first auction held on November 14 resulted in lower clearing
prices for the allowances than had been predicted from the results of futures trading.
Allowance revenue for FY 2013 is now expected to be less than $2 million. In the subsequent
fiscal years within the five-year financial forecast, the allowance revenues are expected to
range from $5.3 million in FY 2014 to $5.8 million in FY 2017. However, the revenue collected
will depend on the actual market value of the allowances. There is no transaction cost
associated with participating in the CARB allowance auction. Existing staffing and regulatory
City of Palo Alto Page 3
resources at NCPA will be utilized to participate in the CARB auctions. As of September 2012
internal guidelines and controls have been put in place to manage CPAU’s participation in the
CARB auctions.
Policy Implications
The proposed recommendation supports the Council-approved 2011 Utilities Strategic Plan’s
environmental sustainability and customer service objective.
Environmental Review
Support of the recommendation to develop a plan to achieve a carbon neutral electric portfolio
does not meet the California Environmental Quality Act’s definition of a “project” under Public
Resources Code Section 21065.
Attachments:
Attachment A: Resolution on the Policy for Use of GHG Allowances (PDF)
Attachment B: Exhibit A to Resolution (PDF)
Attachment C: Staff Report ID 3198 Policy for use of GHG Cap-and-Trade Revenue to
Finance Committee on November 14, 2012 (without attachments) (PDF)
Attachment D: Excerpted Final UAC Minutes of October 3, 2012 (PDF)
Attachment E: Excerpted Draft Finance Committee Minutes of November 14, 2012
(PDF)
*NOT YET APPROVED*
120925 dm 6051774A
Resolution No. _________
Resolution of the Council of the City of Palo Alto Adopting the
Cap‐and‐Trade Revenue Utilization Policy for the Use of Revenues
From the Sale of Allocated Allowances in California’s Greenhouse
Gas Cap‐and‐Trade Auctions
R E C I T A L S
A. The Global Warming Solutions Act, also known as Assembly Bill 32 (AB 32),
requires that California’s Greenhouse Gas (GHG) emissions in 2020 be at the same levels as that
of year 1990, and authorized the California Air Resources Board (CARB) to develop regulations
to reach this goal.
B. CARB’s final regulations became effective January 1, 2012 and are contained in
Title 17 of California Code of Regulations, Sections 95800 – 96023.
C. The GHG emission cap‐and‐trade program is one of several tools designed by
CARB to achieve the state’s GHG reduction goal and its implementation is due to start in
November 2012.
D. As an electric distribution company, the City of Palo Alto has been allocated GHG
emission allowances (allowances) free of charge by CARB.
E. These allocated allowances are estimated to have a market value of $3.5 to $5
million in calendar year 2013 and are expected to increase in value through 2020.
F. Under the terms of CARB’s cap‐and‐trade regulation, the City is required to sell
these allocated allowances in the auctions conducted by CARB and utilize the auction sale
proceeds “exclusively for the benefit of retail electric ratepayers” and “consistent with the
goals of AB 32”. (Title 17 CCR Section 95892(d)(3)).
G. The Council of the City of Palo Alto supports the state’s AB 32 goals, and intends
to implement the City’s Cap‐and‐Trade Revenue Utilization Policy in furtherance of those goals.
The Council of the City of Palo Alto (“City”) does RESOLVE as follows:
SECTION 1. The City’s Cap‐and‐Trade Revenue Utilization Policy (Policy) is adopted as
shown in Exhibit A.
SECTION 2. The Council grants the City Manager or his designee the authority to
implement the Cap‐and‐Trade Revenue Utilization Policy and use allowances or allocate auction
revenues to projects or expenditures as defined in Exhibit A, however, the City Manager shall
not offer rebates to electric ratepayers under the Policy without first seeking Council approval
of such rebates.
*NOT YET APPROVED*
120925 dm 6051774A
SECTION 3. Should California’s cap and trade program and/or CARB regulations
implementing that program be suspended, discontinued, or materially altered such that CPAU
no longer receives allocated allowances of significant monetary value, Council reserves the right
to terminate the Cap‐and‐Trade Revenue Utilization Policy and discontinue any programs
funded from allocated allowance revenues.
SECTION 4. The Council finds that the implementation of this Policy and expenditure of
funds necessary to comply with AB 32 and California’s cap and trade program are reasonable
costs of providing service to CPAU’s electric customers.
SECTION 5. The Council finds that the adoption of this resolution does not meet the
California Environmental Quality Act’s definition of a “project” under Public Resources Code
section 21065.
INTRODUCED AND PASSED:
AYES:
NOES:
ABSENT:
ABSTENTIONS:
ATTEST:
___________________________ ___________________________
City Clerk Mayor
APPROVED AS TO FORM: APPROVED:
___________________________ ___________________________
City Attorney City Manager
___________________________
Director of Utilities
___________________________
Director of Administrative Services
City of Palo Alto (ID # 3198)
Finance Committee Staff Report
Report Type: Action ItemsMeeting Date: 11/14/2012
City of Palo Alto Page 1
Summary Title: Policy for use of GHG Cap-and-Trade Revenue
Title: Utilities Advisory Commission Recommendation that the City Council
Adopt a Resolution Approving the Cap-and-Trade Revenue Utilization Policy
for the Use of Revenues from the Sale of Allocated Allowances in California’s
Greenhouse Gas Cap-and-Trade Auctions
From: City Manager
Lead Department: Utilities
Recommendation
Staff and the Utilities Advisory Commission (UAC) request that the Finance Committee
recommend that the City Council adopt the attached resolution approving the Cap-and-Trade
Revenue Utilization Policy, a policy for the use of revenues from the sale of allocated
allowances in California’s greenhouse gas (GHG) cap-and-trade auctions.
Executive Summary
The California Air Resources Board’s (CARB’s) implementation of a cap-and-trade program,
aimed at reducing California’s GHG emissions, is due to start November 2012. As an electric
distribution company, the City of Palo Alto Utilities (CPAU) has been allocated GHG emission
allowances (allowances) free of charge by CARB. These allocated allowances are estimated to
have a market value of $5 million per year in 2013 and are expected to increase in value
through 2020. Under the terms of CARB’s cap-and-trade regulation, CPAU is required to sell
these allowances in the auctions conducted by CARB and utilize the auction sale proceeds
exclusively for the benefit of retail electric ratepayers and consistent with the goals of AB 32,
California’s Global Warming Solutions Act.
While CARB has not provided further guidance on how it will interpret the regulatory
limitations on the use of revenue from the sale of the allocated allowances, staff recommends a
policy that is consistent with the regulation and minimizes any risk of future CARB action to
rescind CPAU’s allowances or disallow funding of specific projects. The key points in the policy
include:
City of Palo Alto Page 2
Set up a separate account or reserve to track auction revenues.
Abide by CARB’s regulations by using auction proceeds and allowance value obtained by
an electrical distribution utility for the exclusive benefit of retail ratepayers, consistent
with the goals of AB 32, and not use the allowances for the benefit of entities or persons
other than such ratepayers. The policy lists the following allowable uses of the auction
proceeds:
Purchases or investment in renewable resources (outside Palo Alto or locally) for the
electric portfolio;
Investment in energy efficiency programs for the electric portfolio and retail
customers;
Investment in other carbon reduction activities, including those required to achieve
a carbon-neutral electric portfolio; and
Rebate to electric retail ratepayers.
If eventually allowed by CARB, allocated allowances may be used to meet CPAU’s
compliance obligations.
Proposals for rebates to electric customers would be reviewed by Council during the
annual budget adoption process. Additionally, staff will provide annual reports to the
Council on allowance revenues and expenditures associated with complying with
regulations and this policy.
Background
The Global Warming Solutions Act, also known as Assembly Bill (AB) 32, requires that
California’s GHG emissions in 2020 be at the same levels as that of year 1990, or an estimated
15% reduction compared to what emissions might otherwise have been in 2020. CARB was
authorized to develop regulations to reach this goal, and the cap-and-trade program is one of
several tools designed by CARB to achieve the desired GHG reduction goal. Under the terms of
CARB’s cap-and-trade regulation, an overall limit on GHG emissions from capped sectors of the
state’s economy will be set and covered facilities subject to the cap will be able to trade
permits, or allowances, to emit GHGs. CPAU will be allocated GHG allowances (defined as the
authorization to emit up to one metric ton of carbon-dioxide equivalent (CO2e) per allowance)
each year for an eight-year period starting in 2013 as shown in Table 1.
Table 1: CPAU Annual Allowances Allocation for Years 2013 to 2020
Calendar Year: 2013 2014 2015 2016 2017 2018 2019 2020
Allowance Allocation (metric tons)340,533 336,044 322,284 320,461 324,672 317,776 310,204 310,979
City of Palo Alto Page 3
Title 17 of California Code of Regulations Section 95892 offers publicly-owned utilities, such as
CPAU, three options for the use of their allocated allowances:
1. Make the allowances available for auction, using the proceeds of any sale to benefit the
customers they serve;
2. Place allowances in their compliance accounts to meet compliance obligations for
generation plants they operate directly; or
3. Place allowances in the compliance account of a Joint Powers Agency—such as the
Northern California Power Agency (NCPA)—that generates power on their behalf.
Only the first option above applies to CPAU’s allocated allowances. CPAU does not own or
operate fossil fuel based electric generation covered by the cap-and-trade regulations;1 and
NCPA does not operate plants with compliance obligations on CPAU’s behalf. NCPA may import
energy for CPAU, which would create a compliance obligation for CPAU, but these quantities
will be small and CPAU may be prohibited from using the freely allocated allowances for
compliance obligations resulting from imports.2 Therefore, only the first option applies and
CPAU will sell its allocated allowances into the auctions that CARB will be conducting on a
quarterly basis starting in November 2012.3 CPAU’s allocated allowances are estimated to have
a market value of $5 million per year in year 2013 (assuming a $15/ton allowance auction price)
and are expected to increase in value through year 2020, the last year of the regulated period.
Starting in 2015, the City’s gas utility will also fall under the mandate to participate in the cap-
and-trade program, but the impact of the program on the gas utility is not known at this time.
Discussion
While the governing board of each electric distribution company is given some flexibility in
determining how to utilize the value of their allocated allowances, there are limitations. These
limitations have been put into CARB’s regulations to ensure that allowance value is used for its
intended purposes of protecting electricity ratepayers and advancing the goals of AB 32.
1 The four megawatt City-Owned Back-up Generator (COBUG) does not exceed the 25,000 metric ton CO2e
emission threshold. As a result, COBUG does not fall under the cap-and-trade regulation and does not have to
show allowances corresponding to the generator’s GHG emissions.
2 Section 95892(d) currently prohibits the use of allocated allowances to meet compliance obligations for
electricity sold into the California Independent System Operator markets.
3 The allowances for each year of the regulation will allocated the preceding November, except for vintage 2013
allowances that were allocated to CPAU in September 2012 for the November auction.
City of Palo Alto Page 4
Specifically, Section 95892(d) states the following regarding the utilization of allowance sale
proceeds by electric utilities:
“Auction proceeds and allowance value obtained by an electrical distribution
utility shall be used exclusively for the benefit of retail ratepayers of each
electrical distribution utility, consistent with the goals of AB 32, and may not be
used for the benefit of entities or persons other than such ratepayers.”
Starting in June 2014, CPAU will be required to report annually to CARB on the “disposition of
any auction proceeds and allowance value received in the prior calendar year” (Sec. 95892(e)).
The report must include the monetary value of auction proceeds received by CPAU and how the
use of auction proceeds complies with the requirements of the cap-and-trade regulation. The
CARB Board has been clear that the allocations can be changed, or restrictions on the use of
allowance value made more prescriptive, if the regulations are not followed.
Risks and Proposed Strategy
The new GHG cap-and-trade market is anticipated to generate billions of dollars in revenue for
California over the eight year period from 2013 to 2020. Using CARB’s floor and ceiling prices
for allowances ($10 and $50 per ton of emissions, respectively), the total revenues from CARB’s
auctions for 2012-13 could range from roughly $660 million to upwards of approximately $3
billion. This level of revenue has generated intense interest from the Governor and Legislature
to meet the State’s budget needs. In addition, potential participants in the market are
concerned about market manipulation, economic impacts and interstate commerce laws.
There are risks that the cap-and-trade market could be suspended, free allowances or revenues
rescinded if the regulations are deemed to have been broken, or use of the revenues may be
redirected by the legislature. Uncertainties for the UAC and Council consideration include:
What happens post 2020—does the market continue and will there still be free allocations
to electric utilities?
Could the legislature pass laws that reverse CARB’s allocation to electric utilities?
Could legal challenges related to interstate commerce reverse the cap-and-trade regulation
and would that require refunding of any auction revenues received?
Could economic impacts to California result in the governor or legislature overturning or
suspending AB 32?
Could there be litigation if other market participants believe that there is evidence of
market manipulation?
To mitigate the uncertainty in the revenue stream generated from the allowances, staff
recommends that the revenue be used for programs that provide inherent value to CPAU’s
electric ratepayers. Staff also recommends that revenues from sale of the allocated allowances
City of Palo Alto Page 5
be used to fund programs that, even if the funding source is lost, would either continue to be
funded from ratepayer revenue sources or are the types of program that, if discontinued,
would not cause material detrimental economic impact to ratepayers.
Proposed Cap-and-Trade Revenue Utilization Policy
To address the risk of CPAU’s allowances or auction proceeds being rescinded, staff
recommends the following guidelines for use of the auction revenues be part of the policy:
Follow as closely as possible the regulatory requirement that auction proceeds be used
exclusively for the benefit of retail ratepayers of each electrical distribution utility,
consistent with the goals of AB 32, with allowable uses to include:
Purchases or investment in renewable resources (outside Palo Alto or locally) for the
electric portfolio;
Investment in energy efficiency programs for the electric portfolio and retail customers;
Investment in other carbon reduction activities, including the pursuit of a carbon-
neutral electric portfolio; and
Rebate to electric retail ratepayers.
To show how the auction proceeds are being utilized to benefit the electric utility
customers, staff recommends that the policy require staff to report annually to the Council
on allowance revenues and expenditures. Additional Council approval will be required for
any proposed rebate to electric ratepayers, and such review would typically occur during
the City’s annual budget adoption process.
Lastly, staff recommends that the policy allow for the use of the allocated allowances to
meet compliance obligations directly if CARB eventually opts to permit this use.
In accordance with CARB’s annual reporting requirements, staff will coordinate with the
Administrative Services Department to set up a balancing or reserve account that will track the
auction revenues received. CPAU will track the expenditures from the reserve account and
ensure that they are consistent with the Cap-and-Trade Revenue Utilization Policy.
Staff will continue to monitor state proceedings on the use of auction proceeds and provide
recommendations on changes to the policy if further guidance from CARB and the state
legislature is provided. This year the legislature passed a budget trailer bill, Senate Bill (SB)
1018, which added Section 748.5 to the Public Utilities Code specifying the distribution of
City of Palo Alto Page 6
auction proceeds received by the investor-owned utilities (IOUs) such as PG&E. The new code
allows the IOUs to use the funds for clean energy, energy efficiency projects, and credits to
customers, which is similar to the uses/projects proposed by staff for CPAU. However, the
IOU’s are now required to allocate at least 85% of the funds to customer credits. This
restriction does not currently apply to CPAU.
Commission Review and Recommendation
On October 3, 2012, the UAC reviewed the proposed Cap-and-Trade Revenue Utilization Policy.
The UAC discussed some of the potential uses of the revenues including the idea of returning
some of the revenue to ratepayers in the form of a rebate. The Commission also discussed
whether the revenue should be saved in an account until the risk of having to return it was
resolved. Staff explained that the regulations require that the money be spent in support of AB
32’s goals and that banking it could be viewed negatively by CARB, who will be looking for how
the money was spent to benefit electric ratepayers.
The UAC voted unanimously (by a vote of 6 to 0) to recommend that the City Council approve
the proposed Cap-and-Trade Revenue Utilization Policy. The excerpted draft minutes from the
UAC’s October 2012 meeting are provided in Attachment C.
Resource Impact
The FY 2013 budget includes revenue of $2.6 million from expected allowance proceeds. In the
subsequent fiscal years within the five-year financial forecast, the allowance revenues are
expected to range from $5.3 million in FY 2014 to $5.8 million in FY 2017. However, the
revenue depends on the actual market value of the allowances. There is no transaction cost
associated with participating in the CARB allowance auction. Existing staffing and regulatory
resources at NCPA will be utilized to participate in the CARB auctions. As of September 2012
internal guidelines and controls have been put in place to manage CPAU’s participation in the
CARB auctions.
Policy Implications
The proposed recommendation supports the Council-approved 2011 Utilities Strategic Plan’s
environmental sustainability and customer service objective.
Environmental Review
Support of the recommendation to develop a plan to achieve a carbon neutral electric portfolio
does not constitute a project for the purposes of the California Environmental Quality Act.
Attachments:
City of Palo Alto Page 7
Attachment A: Resolution on the Policy on Use of GHG Allowances (PDF)
Attachment B: Exhibit A to Resolution (PDF)
Attachment C: Excerpted Draft Minutes from the Oct 3, 2012 UAC Meeting (PDF)
EXCERPTED FINAL MINUTES OF THE OCTOBER 3, 2012
UTILITIES ADVISORY COMMISSION MEETING
ITEM 4: ACTION: UAC Recommendation that Council Adopt a Resolution Approving the Cap-
and-Trade Revenue Utilization Policy for the Use of Revenues from the Sale of Allocated
Allowances in California’s Greenhouse Gas Cap-and-Trade Auctions
Senior Resource Planner Debra Lloyd summarized the requirements of the Global Warming
Solutions Act (AB32), which authorized the California Air Resources Board (CARB) to develop a
cap-and-trade program for greenhouse gas (GHG) emissions. The City will receive free
allowances, which it must sell in the allowance auctions. CARB provided guidance that the
auction proceeds must be used for the benefit of electric ratepayers and for purposes
consistent with AB32's goals. Lloyd noted that the expected revenue from the allowance
auctions is about $5.5 million per year. However, there are risks that the program could be
deemed illegal or be stopped if it was determined that it was causing economic problems.
There are also risks that allocation of allowances to a utility could be stopped or local control
over the use of the revenues rescinded if the regulations are not followed. The proposed policy
includes strategies to mitigate these risks by using the funds for programs that the City would
invest in anyway such as expenditures for renewable energy and energy efficiency.
Lloyd described the elements of the proposed policy. These include using the revenues for
carbon reducing activities in the electric portfolio – such as renewable resources and energy
efficiency – and rebates to electric utility customers, and annual reporting on the value
provided to the utility’s customers.
Commissioner Waldfogel suggested earmarking a part of the revenues for a rebate to
customers since the investor-owned utilities must do that. Commissioner Hall stated that some
of the money should be earmarked for achievement of the carbon neutral plan as that will be
expensive, but he did not support ratepayer rebates. Commissioner Eglash noted that the
council has not yet approved a carbon neutral plan. Staff noted that any proposals for a rebate
would come back to Council for approval.
Commissioner Melton stated that he supported the proposal and recommended tracking the
money closely. He expects court action and suggested saving the revenue for a couple of years
to mitigate the risk of having to return the money. Commissioner Eglash asked for an
explanation of the risks of spending vs. holding on to the revenue. Lloyd replied that the CARB
regulations required the City to make annual reports starting in 2014 that describe the use of
any auction proceeds, and if the proceeds were banked the City would need to explain how
that was to the benefit of the utility’s customers. Making good use of the revenue reduces the
risk of a losing the free allocation of allowances. Assistant Director Ratchye explained that the
amount of revenues anticipated would be a 5% or less impact on rates if the revenues had to be
returned. Commissioner Melton noted that money is fungible and, to the extent, we spend
this money on renewable energy that we would have spent anyway, there will be more money
that could be spent on CIP projects or any other expense. It essentially becomes an accounting
issue.
Commissioner Eglash asked if we would be required to spend the auction revenue on new,
incremental programs to be in line with the spirit of AB 32. Director Fong explained that the
regulations did not require incremental programs.
ACTION:
Vice Chair Foster made a motion to support staff's recommendation. Commissioner Hall
seconded the motion. The motion carried unanimously (6-0).
FINANCE COMMITTEE
DRAFT EXCERPT
Page 1 of 5
Special Meeting
November 14, 2012
Utilities Advisory Commission Recommendation that the City Council Adopt a
Resolution Approving the Cap-and-Trade Revenue Utilization Policy for the
Use of Revenues from the Sale of Allocated Allowances in California’s
Greenhouse Gas Cap-and-Trade Auctions.
Debra Lloyd, Senior Resource Planner talked about AB 32, California’s Global
Warming Solutions Act (2006). The goal was to reduce California’s C02
(Carbon Dioxide) emission to the 1990 levels by the year 2020. The
California Air Resources Board (CARB) was tasked with implementing AB 32.
AB 32 requires that large emitters report their greenhouse gas (GHG)
emissions and purchase allowances that equal their emissions. The City of
Palo Alto’s electric utility received a free allocation of allowances to help off-
set the cost of electric compliance. It was intended to address the cost
burden and protect customers because they eventually pay for the cost of
the program. She said all of the City’s allowances needed to be auctioned in
the CARB auctions, and as required by the regulations, staff assigned 1/3 of
the allowances to the November 2013 auction; the expected value of the
2013 allowances was $4.4 million. The price of the allowances went down
from what Staff previously projected. There was some discussion of covered
emissions through the City’s electric scheduler, the Northern California
Power Agency (NCPA). She said NCPA might import energy to meet the
city’s load requirement, these imports would be covered under the Cap and
Trade Program, and in that case NCPA would have to surrender allowances
for the imports. Currently, the regulations did not allow the use of freely
allocated allowances toward the resources that were scheduled into the
Independent System Operator (ISO) market due to compliance obligations.
Beginning June 2014, Staff said they needed to begin reporting to CARB on
the use of the allowance value. Regarding the allowance revenue, the
allowance value is to be used exclusively for electric retail rate payers.
Investor owned utilities (IOU’s) are required to allocate 85 percent of their
resources toward direct customer credits. The customer picked up the cost
of the AB 32, and an argument was made that electric distribution
companies, such as Palo Alto, received the allowance value that protected
the customers and mitigated the cost burden. A risk of the program was
that the legislation could take away the allocation on account of them
DRAFT EXCERPT
Page 2 of 5
Finance Committee Special Meeting
Draft Excerpt 11/14/12
making better use of the money. CARB was clear that the resources were
meant to benefit the electric customer; they have said that if this intent is
not met they can stop the allocation of allowances. Another risk is market
manipulation, similar to the energy crises of 2000/2001, there is a lot of
money in the program and so there are concerns about market
manipulation; staff proposes maintaining separate accounts to ensure
transparency, which would help defend against any such accusations. Also,
there was a threat of a court ordered reversal. The California Chamber of
Commerce filed a lawsuit against the Cap and Trade. Their problem was
that the industrial customer was allocated only 90 percent of the
requirement, so they called the extra 10 percent tax unconstitutional.
Council Member Burt asked if, in that case, it was going to overturn the
whole measure.
Ms. Lloyd said the suit had not tried to halt the current auction, but they
may try to halt future auctions.
Council Member Burt said the claim they were trying to make was not that
the measure as a whole was unconstitutional, which was what the prior
claims were, but it was the 90 percent allocation that was not permissible.
Ms. Lloyd said yes.
Council Member Burt confirmed that it did not overturn the whole measure,
but required a redesign of it.
Molly Stump, City Attorney said they needed to look at the way it was
framed and what was before the court.
Ms. Lloyd said all she had to go by was newspaper reports and the
summary. The reports had discussed what the effect might be on the
market price.
Ms. Stump said that question might be complicated because in one case she
cited, it was only one part of a litigation that was inappropriate.
Ms. Lloyd said Staff’s strategy was to follow the guidelines, keep separate
accounts, and, as a utility, they did not want to purchase allowances to
withhold on the market. If they did purchase allowances to withhold on the
market they might be at risk of being accused of market manipulation. Staff
DRAFT EXCERPT
Page 3 of 5
Finance Committee Special Meeting
Draft Excerpt 11/14/12
wanted to use the revenue for programs that provided value to the
customer. She said if the revenue went away, they would either use rate
payer funds to carry on the program funding, or they could stop the program
without any major damage to the customers. The proposal was to follow the
regulatory language and use the revenues for the benefit of electric rate
payers. The uses included: purchases or investment renewable resources,
investment in electric energy efficiency programs, and rebates to electric
retail rate payers.
Vice Mayor Scharff asked if 85 percent went toward a rebate of the electric
rate payers.
Ms. Lloyd said the 85% requirement was for investor owned utilities. She
said other proposals were, if permitted by CARB regulations, to use the
allowances for direct compliance toward the minimal amount of imports they
had. Staff planned to give Council annual reports, and if they proposed a
rebate, they would come back to Council. They wanted to continue to follow
the guidelines on GHG emissions and to coordinate tracking revenues and
expenditures.
Council Member Price asked, in using the revenue for a potential rebate, was
there any language that stated the rebate had to happen within a particular
calendar year or was there pressure to provide the rebate within window of
time.
Ms. Lloyd said there was no timeline but not using the rebate could be seen
as not putting the money to good use.
Council Member Price confirmed that the staff’s proposal was to not bank the
resources and to distribute the resources according to the guidelines.
Ms. Lloyd said there were no restrictions on banking revenues but the
problem was how we would report the banking and show how this was
beneficial to our customers.
Council Member Price asked who the enforcers were.
Ms. Lloyd said CARB was enforcing the program, and it was CARB who
determined the allocation.
Council Member Price asked if they were staffed to enforce.
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Val Fong, Utilities Director said CARB could investigate past service years.
Council Member Price said she was not making suggestions. If there was a
staffing issue on their end, this was a massive effort.
James Keene, City Manager asked what the results of the first auction meant
to the Finance Committee.
Ms. Lloyd said they would know the clearing price, how much was sold, how
competitive the market was.
Mr. Keene confirmed that the results would confirm, or not, what the
estimate was. This gave Council some data, even though they knew the
market fluctuated.
Ms. Fong said they could use the information as a floor price.
Ms. Keene remarked that it gave Council an idea and thought it might be
good to put an explanation of the program on the website.
Ms. Fong said they were working on that.
Council Member Burt asked how Palo Alto’s allowances were determined and
if the City’s future actions affected their future allowances.
Ms. Lloyd said the allowances were set out for AB 32 for the next eight
years. Even though the State goal was an 80 percent reduction from 1990
emission levels, AB 32 put the program statute through the year 2020.
Staff expected that in next eight years things would materialize, as long as
legislature or CARB did not stop the program. The formula was based on
three primary aspects: cost burden to customers, investment’s made in
energy efficiency, and early action in investment in renewables.
Council Member Burt said it was important for the community to know a
good portion of the $4.4 million was a return on past decisions and
investments.
Ms. Lloyd said there were some unallocated allowances and there was not
any talk about taking back the public owned utility allowances.
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Finance Committee Special Meeting
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Ms. Fong said Staff’s risk was not that they get the allowance, but that the
monies received from the auctions be deemed returned by a court to the
people.
Council Member Burt questioned what could be done with the allowance
revenue. There were several goals for the rate payers. He wanted to know
how many goals there were, what they meant, and where they were
balanced.
Ms. Lloyd said the only indication Staff had was the legislation cost on the
IOU’s.
MOTION: Chair Shepherd moved, seconded Council Member Price to
recommend the City Council adopt the resolution approving the Cap-and
Trade Revenue Utilization Policy, a policy for the use of revenues from the
sale of allocated allowances in California’s greenhouse gas (GHC) cap-and-
trade auctions.
John Melton, Utilities Advisory Commissioner said he was not sure what
Sacramento might do because the State could take money away under
various guises; he recommended not sitting on a project for too long.
MOTION PASSED: 4-0