AB32 Implementation: What Really Keeps Us Up at Night?

1. AB32 Implementation: What Really Keeps Us Up at Night? PANC Spring Seminar Scott Tomashefsky Northern California Power Agency May 16, 2012

2. An Initial Thought or Two We have designed our regulation to carefully ensure that the initial price on carbon is strong enough to being immediately sending the right price signals without creating economic shockwaves. We have done this through the design of the allocation. Chairman Mary Nichols, Testimony to California Senate Select Committee on Environment, Economy & Climate Change, June 29, 2011 Those who forget history are doomed to repeat it. George Santayana, “The Life of Reason or the Phases of Human Progress,” 1905

3. NCPA Overview • Joint Powers Agency • 14 members and 2 associate members serving 700,000 residents in communities throughout Northern California. • Builds and operates jointly owned power plants and operates a power pool for members. • Represents members before legislative and regulatory bodies. Established in 1968 Established in 1968

4. AB32 Implementation Aligns with NCPA’s Commitment to a Clean Generation Portfolio • NCPA members already obtain significant percentages of their power supply from eligible renewable energy resources • Also significant large hydro resources which help to mitigate any emissions considerations • Overall, NCPA members currently exceed the 20% RPS requirement for the first compliance period (2011-2013). • NCPA continues to assess additional renewable and low emissions projects on behalf of members Power Supply from Renewable Fuels - 2011

5. What Keeps Us Up at Night? Cap-and-Trade Implementation • Market design dominates implementation discussion • What Is Known Today • Auctions will be held quarterly • Bids will be sealed • Price floors and purchase limits will apply • California will link with Quebec • All that register to participate in auction can bid for allowances, but only covered entities can bid for allowances from allowance reserve • CARB reluctant to acknowledge potential for flaws in market design

6. How Will Allowances Be Distributed? Allowance Price Containment Reserve 1% of 2013-2014 Total 4% of 2015-2017 Total 7% of 2018-2020 Total Free Distribution to Electric Distribution Utilities Mitigates impact of program on consumers 95.8 MMT in 2013, declines to 83.1 MMT by 2020 Voluntary Renewable Electricity Reserve Account 0.5% of 2013-2014 Total 0.25% of 2015-2020 Total Free Distribution to Industrial Sector Output–based so allowance allocation which depends on industrial activity In 2013, expected to be 31% of total allowances Auctions Advance Auction (10% from 2015-2020 Total) Proceeds go to Air Pollution Control Fund, available upon appropriation from Legislature Regular Auction No free allowances have been set aside for natural gas utilities

7. What Does the Electricity Sector Really Get from a Free Allocation of Allowances? • Allowance value on behalf of customers • Closest link to the California consumer • Calculation for every known utility in state • Allowance distribution generally driven by 10-year utility resource plans submitted to California Energy Commission in 2009 • Early action credit capped at 25% of a utility’s cost burden

8. Expected GHG Allowance Allocation NCPA Members Value of allowances to NCPA members exceed $350 million through 2020, assuming a $15 per ton carbon price

9. What Can Electric Distribution Utilities Do With the Allowance Value? Auction proceeds and allowance value obtained by the electric distribution utility shall be used exclusively for the benefit of retail ratepayers of each electrical distribution utility, consistent with the goals of AB32, and may not be used for the benefit of entities or persons other than such ratepayers. Section 95892(d)(3) of the Regulations

10. Mechanics of Cap-and-Trade Options for Use of Free Allowances Purchase allowances to cover obligation Receive proceeds from sale of allowances freely distributed Funds used for AB32 purposes at local level Place in Limited Use Holding Account Transfer to Auction Place in own Compliance Account Surrender Allowances to Meet Obligation Place in Compliance Account of JPA (POU/Coops Only) Surrender Allowances to Meet JPA Obligation

11. And Now A Reality Check… Designing an Auction Marketby August November • CARB outsourcing market design effort • $2 million in consulting services awarded • Western Climate Initiative involved as well • Link to Quebec (led by California) • Provide administrative support for tracking system • Timeline is very, very, very tight • Testing provisions limited in scope • Scope of consulting work does includes “fallback measures” in the event an auction must be cancelled or the system has “failing functionalities” • CARB focusing on “core functionalities”

12. NCPA Focus Going Forward • Despite expected societal benefits of AB32 program, consumers will clearly bear a financial burden • NCPA Objective: Helping membership find lowest cost solution to the AB32 equation • Energy Efficiency • Renewables • Market-based mechanisms • Integration of energy decisions with local governance that extend beyond AB32 • Land use planning related to SB375 • Coordination with city services (Loading order of local government)

13. A Final ThoughtValue of The Joint Utility Group The Joint Utility Group Expected Activities • Will be very active in Phase 2 proceeding at CARB • Will be relied upon for guidance on • Resource shuffling issue • Auction design • Other technical issues that come up