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HomeMy WebLinkAboutFinal-Staff-Report-ID-3198_Policy-for-use-of-GHG-Cap-and-Trade-Revenue-to-Finance-11-14-12 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) *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 $5 million per year in 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 constitute a project under the California Environmental Quality Act, California Public Resources Code section 21080, subdivision (b)(8). 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 Excerpted Draft Minutes of the October 3, 2012 UAC 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.