Industry wrangles over Calif.'s Greenhouse-Gas Law

Fighting global warming is the feel-good cause of the moment.

But in California, the self-congratulation that followed the 2006 passage of the nation's first comprehensive law to curb emissions of planet-warming greenhouse gases is fast turning to acrimony.

A ferocious behind-the-scenes brawl over how to regulate electricity plants, the biggest source of carbon dioxide after motor vehicles, has pitted Southern California's public power generators against its for-profit utilities.

Why? Because some taxpayer-owned utilities such as Los Angeles' Department of Water and Power get close to half their electricity from the nation's dirtiest energy source: coal. And under the system envisioned by Gov. Arnold Schwarzenegger to implement the greenhouse-gas law, utilities probably would be required to buy the right to pollute from the state.

Investor-owned companies with cleaner nuclear and hydroelectric power could reap a windfall for projects to be funded from pollution fees. Those payments could be divvied up based on which utility sells the most electricity &

and investor-owned ones, such as Southern California Edison, are atop that list.

That scenario, yet to be finalized, has Los Angeles Mayor Antonio Villaraigosa and DWP chief H. David Nahai on a lobbying streak in Sacramento, the state capital. Nahai recently accused the state's utilities and energy commissions of promoting "a scheme to line the pockets of large corporations" and "shift billions of dollars away from our communities and our customers and into the pockets of for-profit utilities."

Los Angeles' customers, who thus far have benefited from some of the lowest rates in the state, could end up shelling out $450 million to $700 million a year &

money that the utility was planning to spend building wind and solar plants. Smaller coal-reliant cities also could pay high fees. Bills could soar under such a plan, municipal utility directors such as Nahai warn.

California's battle over the design of this "cap-and-trade" system, which also would allow industries to buy and sell pollution permits among themselves, has erupted as Congress appears likely to adopt a similar market-based system nationwide. Utilities around the United States are jockeying for position on the penalty-versus-windfall balance sheet.

Michael Peevey, president of the California Public Utilities Commission, which is charged with recommending global-warming rules for the electric industry, says Los Angeles officials "are fighting with phantoms.... They're doing a pre-emptive strike to carve themselves out" of a statewide program.

"There's no free lunch," Peevey warns. "We have to reduce CO2 by 174 million tons by 2020. But no one wants to face up to the cost. Everyone wants everyone else to pay."

California's law requires cutting greenhouse gases to 1990 levels by 2020, about 25 percent below expected levels that year, and aims to reduce them by 80 percent by mid-century. A draft plan on how to meet those goals is to be released in June by the state Air Resources Board.

Under a cap-and-trade program, the state would impose a ceiling on emissions. Companies whose emissions are below the cap could sell their pollution permits to industries that pollute above the cap. The system has been launched with mixed success in Europe, where it has been undermined by dubious emissions accounting.

Monitoring smokestacks inside California is the easy part of the regulation. Imported power presents a problem. Because California has no authority to clamp down on coal plants in other states, the utility and energy commissions recommended that the air board regulate "first deliverers" who bring the power to the border of the state &

be they utilities or middlemen who market imported electricity.

"It is bad policy, ripe for gaming and manipulation," Nahai said. "First deliverers can be faceless foreign companies beyond our control, with no assets and no interest in keeping the lights on."

Gary Stern, an economist for Southern California Edison, which supports the first-deliverer rule, acknowledged that out-of-state generators could obscure the source of their emissions from California regulators. "If I want to buy power from Utah, then the Utah company can arrange a deal to sell coal to the Northwest, and buy hydro from the Northwest and sell it to us. It will look clean, and we won't know that it sold coal."

But he said the rule would at least prevent California generators from gaming the system.

To critics, the complexities of cap-and-trade recall the sort of wheeling and dealing that cheated California out of millions of dollars when it deregulated the power system in the late 1990s. Legislative leaders want Schwarzenegger to withdraw the administration's preliminary design. It's "a scheme that gambles with California's energy supply in a way reminiscent of the events leading to the energy crisis," Assembly Speaker Karen Bass and several Los Angeles legislators wrote the governor.

This week, the utilities commission is expected to propose an auction system that would establish a cap and require utilities to buy credits for emissions above that level.

If that happens, the state could collect billions of dollars a year from polluters, and as Air Resources Board Chairwoman Mary Nichols notes, "A big pot of money means someone has to figure out what to do with it, and that involves politics."

Pacific Gas Electric wants the money to be redistributed to utilities according to their size. That would enable the utility to cut rates. "We're looking out for our customers who have invested in clean energy for decades," PGE spokesman Keely Wachs said.

But if utilities have to pay for pollution credits and then to build renewable-energy plants, Nahai says that would "cripple" the effort for Los Angeles to green itself. In the past two years, DWP has boosted its renewable energy mix from — percent to 8 percent and is on target to get 20 percent of its power from renewables by 2010, an expensive undertaking.

Nichols of the air resources board sees an auction system as the most efficient way to achieve greenhouse-gas reductions and said she would be reluctant to exempt the Los Angeles utility from a cap-and-trade program, as Nahai has asked. Of the state's major utilities, "DWP is the biggest CO2 polluter," Nichols said. "Having this forced on them could be the best thing that ever happened to them."

Compromises are being discussed. Nonetheless, she acknowledges, "I don't see us coming up with a system that involves PGE making a profit on DWP's misfortune. You could have an auction where the state keeps 5 percent of the revenue, and 95 percent stays at DWP, as long as they show they will use it to reduce carbon."

In the end, given the fact that half of California utilities' carbon emissions come from imported power, many experts see a broader system as the only way to make cap-and-trade work. A bigger tent would make it more difficult for coal plants to escape regulation while shipping power across state borders.

"We need national legislation for the electricity markets," Nichols says. "Electrons don't carry little flags as they move around."

Regional compacts in the West, the Midwest and the Northeast have been formed to design multistate trading programs. The U.S. Senate's cap-and-trade climate bill, sponsored by Joe Lieberman, I-Conn., and John Warner, R-Va., is expected to come to a vote in June, although final legislation may have to await the election of a new U.S. president.

Meanwhile, California is moving full speed ahead, trying to bob and weave around the regulatory complexities.

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