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Rebate Debate Over Utility-Sector Cap & Trade Revenues

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If you've been wondering whatever happened to Cap & Trade in California, it's not your fault. The topic has bounced around several state agencies, and it was tied up in the courts for awhile. But now is a good time to tune back in, because they're talking about how to divide up the money, and things are starting to get interesting (that is, if you like getting money).

The state Air Resources Board (ARB) passed an initial Cap & Trade rule on Dec. 16, 2010. After weathering the first wave of litigation, ARB adopted the regulation on Oc. 20, 2011. ARB decided to divide the companies under the emissions cap into three categories: electric utilities, industrial and transportation. The agency with authority over the allocation of allowances (worth billions of dollars) for the electricity sector is the California Public Utilities Commission.

Europe's experience with their Emission Trading System taught us that even if companies are given free allowances, they will still raise prices to consumers. But in California, utilities successfully argued that CPUC regulations won't let them raise rates to cover their costs. So rather than risk bankrupting utilities, ARB said they can have the free allowances, but they must:

ensure that the proposed allowance value [be] directed to the electric distribution utilities is used for the benefit of residential, commercial, and industrial ratepayers that might otherwise face indirect costs from the implementation of this regulation, with particular consideration of the potential for impacts from this program on low-income customers, and for the purposes of AB 32, which could include investment in energy efficiency programs beyond those already required by California law and in renewable energy projects that achieve environmental and public health co-benefits for Californians.

Here's how it will work:

1) ARB allocates allowances to the utility (Investor Owned Utility - IOU)
2) IOU auctions allowances to generators
3) Generator raises its rates to cover cost of allowances
4) IOU buys electricity from generator at the higher cost
5) But since the generator presumably absorbs some of the cost, some revenue that the IOU takes in remains and must be used to alleviate ratepayer cost burden


Billions of dollars on the table

According to the CPUC Order instituting the rulemaking, at the minimum price of $10 per metric ton, the electric utilities could receive approximately $650 million for the quarterly auctions that ARB has planned to be held during 2012. Others estimate revenues for the seven-year program at around $5.8 billion just for the electricity sector.

With billions at stake, here are some of the positions various groups are taking:

  • Large industrial electricity users and the utilities argue that larger users should be given larger rebates (this is called "volumetric"). They believe that the current rate structures already subsidize lower-income and lower-use customers. The utilities also say it is cheapest to just put the rebate amount right on the bill. Counterarguments to these positions are that volumetric, on-bill rebates prevent high users from seeing a price signal that would encourage conservation, and miss the opportunity to get the public political support for the program generated if they sent checks in the mail instead.
  • A coalition of environmental groups and some local governments are interested in using a higher percentage of revenues for investments, even if it reduces the rebates to consumers. The danger here is if the consumer rebate gets too small, then weak political support could topple the program similar to how New Jersey backed out of the RGGI carbon trading program.
  • Consumer and ratepayer advocates have a variety of suggestions. The CPUC's own Division of Ratepayer Advocates (DRA) proposed returning 90 percent of anticipated revenue to ratepayers in the form of annual rebate checks (off-bill) and allocating the remaining 10 percent to innovative energy efficiency financing. But there are some issues. They calculate the rebate on a volumetric basis, which dilutes the incentive to big users for energy efficiency and the proposal would not cover the lowest income ratepayers (known as "CARE customers"), because they say those rates are already subsidized. DRA argues that the rebate should only cover ratepayers who are directly impacted by the increase in price in electricity. DRA's position seems informed by ARB's division of the program into three distinct sectors, leading electricity policy to focus exclusively on electricity bills, but ignoring more holistic arguments that lowest income households could face disproportionate carbon costs in other sectors. Another consumer advocate group, The Utility Reform Network, seems to want either 90 percent or 100 percent rebate, and they are very skeptical of investments. Other consumer and low-income advocates like the higher rebate amounts, but want to cover the low-income customers too.

Although they differ on the exact amount of the rebate, both the environmental coalition and the ratepayer advocates are strongly united behind maintaining the integrity of the carbon price, and using the rebate as an educational tool to inform the public about what they can do to lower their utility bill. The various groups will be submitting comments through mid-February, and the CPUC will issue a decision in June 2012.

Meanwhile, the revenues from the industrial sector were mentioned in Gov. Brown's draft budget for 2012-2013. About $1 billion is proposed for budget deficit reduction, and about $500 million would go towards environmental and energy programs. Despite the recommendation from the Economic and Allocations Advisory Committee, the governor did not allocate any money from the industrial sector to a Cap & Dividend approach that returns revenues back to the public, as the co-owners of the Sky Commons dividends. For that to happen, supporters in state legislature would need to speak up during the contentious budget process between now and June.

In other words, if you want a piece of the Cap & Trade money, it's time to speak up.

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