California Public Utilities Commission Issues Third Proposed Decision Authorizing Tradable Renewable Energy Credits

Out-of-state renewable energy projects could be adversely impacted if the proposed order were adopted. The proposed decision would define all renewable generation purchased from out-of-state facilities¹ as the purchase of unbundled or tradable RECs, making any out-of-state renewable energy sale subject to the cap that bars the large investor-owned utilities from using such sales to meet more than 40% of their RPS obligation. Although the proposed decision states that this classification would apply only to contracts signed on or after the effective date of the decision, contracts signed prior to the effective date would be considered REC-only contracts from the effective date forward, and would be “subject to the limits and rules applying to REC-only contracts” according to the proposed decision. Furthermore, although the purchase of tradable RECs from out-of-state facilities would be permitted, the delivery requirement in the RPS legislation would still have to be met, so a comparable amount of power would have to be imported into the state, along with the RECs. The jurisdiction to determine whether and how this delivery requirement is met, however, still remains with the California Energy Commission.

Comments on the proposed decision are due on January 19, 2010, and reply comments are due January 25, 2010.

Proceeding History

The CPUC has been considering the possibility of using tradable or unbundled RECs for years. As far back as April 2006, CPUC staff circulated a white paper, "Renewable Energy Certificates and the California Renewables Portfolio Standard Program," on the potential use of tradable RECs to meet RPS requirements. In 2006, the California legislature also passed Senate Bill 107, effective January 1, 2007, which authorized but did not require the CPUC to allow the use of tradable RECs. On October 29, 2008, the CPUC issued its first proposed decision authorizing the use of the tradable RECs, and the decision appeared on the agenda for the December 4, 2008 meeting. Before the CPUC voted on the decision, however, it was held (i.e., removed from the agenda and placed on the agenda for a later meeting) in succession by Commissioners Simon, Bohn, and Grueneich (twice) and President Peevey, ultimately placing the decision on the agenda for the March 26, 2009 voting meeting. Prior to that meeting, however, the proposed decision was withdrawn and a new decision, containing a number of substantive revisions, was issued. The issuance of a new proposed decision triggered another comment period and further delayed a vote on the decision.

During this period, the California legislature was also considering several bills, including Senate Bill 14 and Assembly Bill 64, that would have increased California's RPS requirement from 20% to 33%. The proposed legislation also would have addressed legislative requirements for the delivery of power to California. Under the current RPS statute, power is required to be delivered to California to count toward a utility's RPS requirement, but the California Energy Commission is tasked with determining whether delivery as occurred was sufficient to qualify the generation as eligible renewable generation. Some parties had raised concerns that the Energy Commission's delivery requirements were too flexible, and allowed or could allow coal generation from out of state to be attached to RECs from an eligible renewable resource and thus imported into the state as renewable power. The proposed legislation would have imposed stricter delivery requirements requiring simultaneous delivery for out-of-state projects, and in turn allowed some percentage of unbundled RECs to be used toward RPS compliance, including unbundled RECs from out-of-state projects that could not meet the delivery requirements. Under the current proposed decision, even projects from out-of-state that can simultaneously delivery power to California.

The CPUC held off any decision on tradable RECs as the legislature considered revising the RPS statutes. In September of last year, the legislature passed both SB 14 and AB 64, but Governor Schwarzenegger vetoed the two bills, in part because the strict delivery requirements were inappropriate.

Now that the legislative efforts have been rejected by Governor Schwarzenegger, the CPUC has once again stepped forward to develop guidelines for the use of tradable RECs. The state's major investor-owned utilities have also continued to express interest in being permitted to use such a compliance tool. On October 29, 2009, Pacific Gas and Electric submitted an application (A.09-10-035) requesting approval of two tradable REC purchase agreements executed with Sierra Pacific Industries and TransAlta. The application acknowledged that the CPUC had not yet approved those transactions, but suggested the CPUC might do so either prior to or concurrently with a decision on the application.

For more information, please contact:

Seth Hilton at (916) 319-4749 or sdhilton@stoel.com
Howard Susman at (858) 794-4111 or hesusman@stoel.com
John McKinsey at (916) 319-4746 or jamckinsey@stoel.com

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¹ An out-of-state facility would be a facility for which the first point of interconnection is not physically within California and for which the first point of interconnection does not lie within the California ISO or another California balancing authority area. Thus, a facility that is physically located outside the state but that has its first point of interconnection within the California ISO would still qualify as in-state generation. Out-of-state generation must be interconnected within the WECC to be eligible renewable generation under California's RPS legislation.