On August 25, the California Public Utilities Commission (“CPUC”) issued a proposed decision (“PD”) that would end the CPUC’s moratorium on approval of tradable renewable energy credit (“TREC”) transactions and increase the cap on such transactions for large investor-owned utilities to 40%.

Previously at its March 11, 2010 meeting, the CPUC authorized the use of TRECs for compliance with California’s Renewable Portfolio Standard (RPS), subject to certain limitations. CPUC Dec. 10-03-021 (Mar. 15, 2010)(“March Decision”). Among the limitations that the March Decision imposed was a cap limiting the use of TRECs for RPS compliance for the largest investor-owned utilities (Pacific Gas and Electric, Southern California Edison, and San Diego Gas and Electric) to 25% of their annual RPS compliance obligations. That cap was to remain in place until December 31, 2011, when the CPUC would consider modifying or removing that limitation. The March Decision also imposed a price cap of $50 per TREC. The price cap also expires on December 31, 2011.

After issuance of the March Decision, Southern California Edison, Pacific Gas and Electric and San Diego Gas and Electric filed a joint petition for modification of the decision, seeking, among other things, modification of the usage and price caps, and modification of the criteria used to determine whether a contract was a TREC transaction subject to the 25% cap. The Independent Energy Producers Association also filed a petition for modification seeking modification of the criteria used to determine whether a contract was a TREC transaction.

On May 6, 2010, the CPUC issued a decision staying implementation of the March Decision pending resolution of the petitions for modification. CPUC Dec. 10-05-018 (May 12, 2010)(“May Decision”). The May Decision also imposed a moratorium on approval of any contracts that would be defined as TREC transactions under the March Decision.

The PD issued yesterday would lift the stay imposed by the May Decision, and end the moratorium on approval of contracts defined as TREC transactions. The PD would also modify the cap on TREC transactions, allowing the largest investor-owned utilities to meet up to 40% of their annual compliance obligations through TREC transactions. The PD would further modify the cap by exempting future deliveries under contracts approved prior to the effective date of the March Decision from counting toward the cap. The March Decision would have included any future deliveries under existing contracts categorized as TREC transactions towards the 25% cap. The PD, however, would not alter the criteria used to determine whether a transaction was a TREC transaction.

The definition of TRECs established in the March Decision (and unchanged by the PD) could have a significant effect on the use of generation from renewable resources located outside of California. TRECS are generally defined as renewable energy credits that can be traded separate and apart from the energy associated with their creation, in contrast to bundled transactions in which both the renewable energy credits and the associated power are sold together. The March Decision defined as bundled transactions any transactions with a generator that had its first point of interconnection with a California balancing authority, or in which the power associated with the renewable energy credits was dynamically transferred to a California balancing authority. The March Decision also recognized that some transactions with firm transmission arrangements might qualify as bundled transactions, but left that for future consideration.

The definition of bundled transactions adopted by the March Decision would mean that any transactions with renewable resources that do not have their first point of interconnection with a California balancing authority, or do not dynamically transfer power to a California balancing authority, would be deemed a TREC transaction subject to the cap. This would be true even if the renewable resource delivered power to California under a firming and shaping arrangement. The more generous cap proposed by the PD would allow California’s largest investor-owned utilities to enter into more contracts with renewable resources located outside the state.

The PD will not be on the Commission’s voting meeting agenda for at least thirty days from the date the PD was issued. Comments may be submitted on the PD by September 14, and reply comments are due by September 20.

Also looming on the horizon is the California legislature’s consideration of Senate Bill 722. Senate Bill 722, as currently drafted, would adopt statutory limits on the use of TRECs, as well as defining what would qualify as a TREC transaction. The legislature has until August 31, 2010, to approve SB 722. However, Governor Schwarzenegger has stated that he will veto the bill (as he did with similar legislation last year), unless the legislature increases the cap on TREC transactions. If SB 722 passes, however, in a form that Governor Schwarzenegger is willing to sign, it would preempt the standards established in the PD.

If you have any questions about the issues of this update, please contact:

Steven Hall at (503) 294-9434 or schall@stoel.com
Seth Hilton at (916) 319-4749 or sdhilton@stoel.com
Marcus Wood at (503) 294-9434 or mwood@stoel.com