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The document also contains a requirement that officials of the new institute seek matching funds from other sources at least equal to the money coming from ratepayers.

Overseeing the institute, which was charged with working collaboratively with the state’s colleges and national laboratories, will be a board composed of government officials, university officials, lawmakers and representatives of utilities, environmental groups and certain industries, including agriculture. It will be co-chaired by the utility commission president and the president of the University of California. A physical headquarters for the institute is yet to be determined.

The California commission’s vote comes amid increasing calls for public financing of research and development to discover and implement new technologies to mitigate global warming (see Climate Law Update story here).

Still, there was clearly unease about charging the state’s ratepayers for the costs. The institute will be funded by a surcharge on electric and gas customers’ bills. Peevey noted that some have asked why utility ratepayers alone should be asked to pay for the institute. His response:

“The short answer, frankly, is that they shouldn’t. Ratepayer financing should serve as seed money to leverage other public and private sources of funds, and I think it will. Certainly broad-based taxpayer financing would be preferable, if it was available. But we cannot wait for the Legislature to allocate funds any more than the United States can defer decisive action on climate change until China and India take action.”

Despite voting for the proposal, Bohn expressed deep reservations:

“By this action we announce our intent to assess the private utility ratepayers of the state of California $600 million over a 10-year period in order to establish and operate a new organization devoted to seeking and implementing technology solutions to the global problem of climate change. We are, in short, telling the ratepayers that as a condition of receiving essential utility services delivered by monopoly enterprises under our jurisdiction they are required to pay for research and commercialization of technologies that may indeed never deliver the results that impact global warming or, at best, are unlikely to deliver those results in the near term.”

Bohn concluded that the commission's decision "pushes the boundaries of our duty and our jurisdiction almost to the breaking point."

The institute’s work is to be carried out under a strategic plan scheduled to be in place in about a year. The governing board was also charged with establishing panels to establish protocols for transferring technology and looking at potential workforce impacts in the energy sector.

In a separate move, the utility commission approved a $4.6 million request by Southern California Edison to participate in a study on reducing greenhouse emissions from coal-fired electricity generation. The technology under consideration, according to a statement from the utility commission (see text here) would convert coal through a gasification process into predominantly hydrogen and carbon monoxide gases. The hydrogen would fuel a power plant while the carbon monoxide would be sequestered underground.

Peevey said the company would participate in a project known as the Southwest Regional Partnership on Carbon Sequestration. Among other participants, the U.S. Department of Energy has put $65 million toward the effort, he said.

(Photo of California Public Utilities Commission building: Climate Law Update)

Although some groups, including those concerned about pollutants affecting poor and minority populations, have opposed cap and trade markets, the idea has gained support among other environmentalists and business groups. Peevey strongly backed the approach in remarks before the commission voted Thursday:

“A cap and trade program is likely to produce additional emissions reductions beyond the mandatory programs, it can tackle a wider variety of sources, potentially at a lower cost. It also encourages investment in innovative technologies that lower greenhouse gas emissions.”

But Peevey acknowledged that officials have only just begun to take on what he called the “thorny issue of allocation,” referring to the critical question of how emissions credits or “allowances” will be distributed among those producing greenhouse gases. Under a cap and trade system, credits represent the right to emit a certain amount of greenhouse gases. The document approved by the two commissions recommends that some credits be auctioned, suggesting that the money be used to benefit ratepayers or support energy efficiency and renewable energy investments. But it does not resolve important questions such as what proportion of the credits should be auctioned and how many sold or given away for free:

"Based on the current record, we are not able to determine the proper
relative roles of auctions and administrative allocation of allowances in a
deliverer-based system. Several parties recommend that there be a gradual
transition over several years from relatively more administrative allocations
initially to relatively greater reliance on allowance distribution via auctions.
Distributing some amount of allocations administratively in the early years of
the program could reduce the immediate impact on entities that would bear the
costs of obtaining allowances, and would give them more time to develop
emission reduction strategies. Based on the current record, it may be reasonable
to provide a transition from small amounts of auctioning in the early years to
greater amounts in later years. However, we require more analysis before
making a determination on this issue."

Peevey, during his presentation, said it would not be the commissions’ intention to punish utilities based on their past investments or decisions made prior to the passage of AB 32. However, he cautioned that the state’s retail electricity providers “are starting off in very different positions” with respect to their emissions. He noted, for instance, that some large public utilities spew twice as much carbon dioxide per unit of energy produced than do the state’s private utilities and some other public entities.

The allocation recommendation is expected to be addressed in a subsequent document to be ready in August.

Although other commission members lauded the recommendation, Commissioner Timothy Alan Simon expressed some concerns about the potential impact on municipally owned utilities. He said he would “closely monitor” the next phase to make sure that those utilities, over which the commission has no regulatory authority, are “treated fairly.”

The document is in the form of a proposed decision to be presented for consideration by the full five-member CPUC. If adopted by the panel, the paper would  then constitute a recommendation to the California Air Resources Board, which is the key body in charge of implementing AB 32,  the law that mandates big reductions in California climate-change emissions by 2020 and which officials hope to have up and running by 2012.

Peevey wrote:

We favor inclusion of the electricity sector in a cap-and-trade program for
a number of policy reasons. While we fundamentally favor a certain minimum
level of mandatory reductions from existing programs as described above, a
cap-and-trade system in combination with these mandatory reductions should
be able to produce the GHG emissions reductions required by AB 32 at a lower
cost than reliance on additional mandatory reductions. This is because emissions
trading maximizes flexibility in achieving emissions targets by allowing
obligated entities to rely on the least-cost options across the entire economy.

Significantly, Peevey wrote that any cap-and-trade program must include a component to include electricity imported from other states. While California gets about 20 percent of its juice from neighboring states, those imports represent more than half of the greenhouse gas emissions from the sector, he noted.

It was partly along those lines that he recommended that electricity deliverers to the grid bear the burden of complying with AB 32. Other options would have placed the responsibility on retail providers; in-state generators, with no inclusion of imports in the cap-and-trade system; and in-state generators, with retail providers as the point of regulation for imports. All the choices were evaluated against a set of criteria including "environmental integrity," accuracy and ease of reporting, compatibility with ongoing reforms in energy markets and legal issues.

The so-called deliverer option worked best, Peevey wrote:

After evaluating the point of regulation options against these key criteria,
we find that the deliverer option best meets the criteria. Each of the other
options has serious shortcomings regarding one or more of our priorities. The
deliverer system provides for the environmental integrity of the system by
covering imported power as well as in-state generation. It also shares a number
of common characteristics with a pure generation-based point of regulation
making it likely to be compatible with the eventual design of a cap-and-trade
system that is broader in geographic scope (regional and/or national). The
deliverer point of regulation also improves the ability to report and track
emissions in the sector and minimizes the impact of AB 32 GHG regulations on
California’s wholesale electricity markets. Finally, the deliverer method can be supported on legal grounds.

Despite advocating the inclusion of a market-based approach in efforts to control climate-changing emissions from the electricity sector, Peevey shied away from backing an immediate move along those lines for natural gas. He cited "key differences between the electricity and natural gas sectors" for his recommendation to leave gas out of the equation for now. Those included, he wrote, "significantly fewer options" for reducing greenhouse emissions in the natural gas sector and the "very limited availability of low-carbon alternatives" to gas. However, he added that as California gains experience with a cap-and-trade system and other developments occur, "it may become appropriate" to add the natural gas sector to such a system.

Peevey cited support for a cap-and-trade approach from a wide range of interests, not all of whom usually see eye-to-eye, including environmental groups, utilities, power suppliers and others.

There isn't unanimity among all of the parties, however, as reflected in written comments filed with the CPUC.  Environmentalists, including The Natural Resources Defense Council, filed comments urging officials to "move forward in designing a [greenhouse gas] cap and trade program for electricity. Those same organizations also advocated that California go ahead with "a cap and trade system that includes natural gas, even if regional and federal programs have not yet emerged." Meanwhile, El Paso Corporation, a large natural gas supplier, submitted arguments urging a wait-and-see approach to imposing a gas cap and trade system. The Utility Reform Network, a vocal California ratepayer group, asked that any cap and trade system adopted for 2012 exclude electrical generation, arguing that the state would be better off "promoting existing policies that result in real GHG reductions" and taking other steps, such as developing a regional tracking system for the emissions.