Testimony of John W. Busterud
Director and Counsel – Environmental Affairs
Pacific Gas and Electric Company

Before the Senate Energy, Utilities and Communications Committee
Subcommittee on Alternative Energy

Hearing to Examine AB 32 Implementation

August 28, 2007

Good afternoon Madame Chair and members of the Sub-Committee. My name is John Busterud. I am Director and Counsel, Environmental Affairs, for Pacific Gas and Electric Company. PG&E is a gas and electric utility serving one in twenty Americans and is committed to leadership on climate change.

We are a charter member of the United States Climate Action Partnership and the first investor-owned utility to support enactment of California’s historic climate change legislation: AB 32. Our customers have invested and continue to invest in customer energy efficiency programs and a clean electric generating portfolio, so that our greenhouse gas emissions are among the lowest of any utility in the nation. During the 2006- 2008 period alone, PG&E expects to spend more than $1 billion of customer funded revenue for various customer energy efficiency and demand reduction programs that will save about 3063 gigawatt hours of electricity and 47.5 million therms of natural gas. The greenhouse gas emissions associated with the electricity we provide to our customers are among the lowest of any large utility in the country, approximately 40% of the CO2 emitted by the average utility. 95% of our utility owned electric generation emits no CO2 at all.

PG&E welcomes this opportunity to share some initial perspectives on AB 32 implementation and looks forward to working with you, the California Public Utilities Commission, the California Energy Commission, the California Air Resources Board and concerned stakeholders to ensure the successful implementation of this landmark environmental law.

We approach AB 32 implementation guided by three key objectives. We need to:

1. Ensure environmental integrity through mandatory, real and verifiable reductions;
    
2. Manage costs to California consumers and businesses by pursuing cost-effective reduction strategies and recognizing the significant investments our customers have made and continue to make to reduce greenhouse gas emissions; and
    
3. Maintain California’s national leadership role on climate change by creating a model program that can be integrated effectively with future regional, national and international programs.

We expect that the California Air Resources Board will carefully consider a combination of traditional regulatory programs and market-based initiatives. We believe the most effective and efficient of these potential market-based tools would be a cap-and-trade regulatory program with broad, economy-wide participation. Market-based strategies -- such as cap and trade – provide economic incentives and the flexibility to cut emissions in the most innovative and cost-effective ways. This approach is key to driving development of the next generation of clean, highly energy-efficient technologies and practices. We believe a properly designed cap-and-trade system – coupled with our customer energy efficiency, renewables and demand-side management programs– will reduce greenhouse gas emissions, diversify our energy supply mix and help to minimize customer costs.

Before I go further, it is important to emphasize at the outset that regardless of the regulatory approach taken under AB 32, we will not waiver in our continued commitment to the 20 percent Renewables target, Customer Energy Efficiency and Demand Side Management, including deployment of “Smart Grid” technology, and clean, distributed generation. These are independent, free-standing programs that complement, but are not governed by, AB 32. Our customers have made and will continue to make significant investments in these best-in-class programs, which serve as a model for other utilities, states and the rest of the country to follow.

Turning now to the specifics of AB 32 implementation, we believe a properly designed greenhouse gas control program should include the following elements:

Standardized emissions reporting is an essential first step and must form the basis of any mandatory program. Developing consistent and coordinated greenhouse gas emission inventories and protocols for standard reporting and accounting methods for greenhouse gas emissions is fundamental to establishing a credible reduction program that is capable of tracking and verifying progress toward emissions goals and facilitating a tradable emissions credit system. PG&E was a Charter Member of the California Climate Action Registry, which is now working with more than 30 other states to develop a consistent set of reporting standards and protocol. We are working with the CPUC and the ARB to develop sound 1990 emissions baseline data and to develop reporting regulations to assure accurate reporting of emissions data.

We should equitably apportion reduction obligations: Statewide reduction obligations should be apportioned to ensure that no single sector, nor its customers, assumes a disproportionate financial burden due to reduction obligations. To this end, PG&E filed comments and testified before US EPA in support of California’s request for a waiver from federal preemption for its motor vehicle greenhouse gas emissions standards. While these standards will not entirely address greenhouse gas emissions from the transportation sector, they are an important step in the right direction.

We should create a clear glide path that takes a gradual approach to meeting reductions to avoid potentially adverse economic consequences. This approach provides opportunity to leverage existing, cost-effective reduction technologies, while providing time for needed new technology solutions to develop; it also ensures a significant contribution from the electric sector toward a broader, economy-wide reduction goal. Providing a clear glide path with a longer-term target sends appropriate price signals, which will be vital for driving investment in low-carbon technologies.

Create a Broad Trading Market: Climate change is unlike any other air quality challenge, as it is truly a global issue. A robust market can be assured by including as many industry sectors and participants as possible, ensuring that program design elements are scalable and consistent with other regions, and creating linkages to other existing and emerging regional programs and, ultimately, a federal or broader international program.

We need to provide compliance flexibility to meet AB 32’s targets in a cost-effective manner. These can include banking of emissions allowances, the use of environmentally sound and verifiable carbon offsets and multi-year compliance periods. This last element is critically important to the power sector, where temperature, rain and snow-fall variability have a significant effect on year-to-year emissions. Additional cost-control measures to address unanticipated and sustained market impacts could include a strategic allowance reserve or cost safety valve, which could be triggered under pre-established criteria.

Select a “point of regulation” under AB 32 that will promote real emissions reductions and serve as a model for emerging regional, national and international programs.

The point of regulation for AB 32 should drive investment in low-GHG technologies, be simple to administer, provide for the most accurate accounting of GHG emissions, and minimize leakage of GHG emissions. For the electric sector, a structure that imposes the point of regulation on generators within California and on those that first import power generated outside of the state for delivery and consumption within California has the most promise for achieving these objectives. This approach is known as a “first-seller point of regulation.” The primary difference between a load-based approach and a “first-seller approach” is that the load-based cap places the point of compliance on the retail load serving entity based on its purchases of power, while the first-seller approach places the point of compliance on the direct sources of in-state emissions (generating facilities) and on entities responsible for the first sale and delivery of power into the state. Taking this approach will: (1) ensure environmental integrity through real and more verifiable greenhouse gas emissions reductions by allowing for more accurate accounting and attribution of emissions and minimizing “leakage” of GHG emissions; (2) more directly impact generation investment decisions; (3) internalize GHG compliance costs in electric dispatch; and (4) because it focuses on actual emissions sources, it will enhance California’s leadership position on climate change by serving as a model for emerging regional and national programs, which we believe will ultimately be source based.

Emission Allowances Should Be Allocated and Distributed in a Manner that Most Directly Mitigates Costs to Customers, Rewards --Rather Than Punishes-- Early Action, Promotes Early Investment in Clean Technologies, Avoids Windfalls and Positions California as a Model for Federal, Regional and International Programs. We offer the following principles, which guide PG&E’s thinking on the distribution of emissions allowances:

• Recognize that the customer at the end of the energy supply chain—like the households and businesses that we serve—will ultimately bear a substantial share of the costs associated with the regulation of greenhouse gas emissions. The allocation system should be used to help mitigate these costs.
   
• Avoid creating unintended “windfalls” for companies by granting allowances whose value is far in excess of the costs of compliance or of mitigating costs for those company’s customers.
   
• Avoid penalizing early actors and their customers for investments made prior to AB 32 that are cleaner than other entities or other states.
   
• Accelerate the development and deployment of new technologies, including renewable generating technologies, end-use energy efficiency technologies, and carbon capture and storage technologies.
   
• Avoid “de-positioning” California in the quickly emerging federal debate on greenhouse gas allowance allocation among higher- and lower-emitting states, such as California.

Decisions made regarding the point of regulation and to whom emissions allowances are allocated are distinct public policy issues with significant economic and environmental implications, and should be addressed as such. California has an opportunity to develop an allowance allocation methodology that can both achieve the above public policy objectives and serve as a model for federal and other policymakers.

Regardless of where the point of regulation is placed, for the utility sector, customers will bear the lions’ share of greenhouse gas reduction costs. For this reason, The National Commission on Energy Policy, the California Market Advisory Committee and the Natural Resources Defense Council in separate reports have each outlined an allowance allocation methodology that we find compelling and believe can avoid the inequities and the inefficiencies that stem from an Acid Rain-style generator based allocation approach, while benefiting electricity consumers. Rather than allocating free allowances to power plants, allowances would be allocated to load serving entities (LSEs) on behalf of their customers. LSEs would in turn be compelled to sell the allowances allocated to them to regulated sources, returning the proceeds to their customers through rebates, credits or other programs that help to mitigate costs or reduce demand. In this way, the value of the allowances flow directly to energy consumers, who ultimately bear the costs of the program. Of course, the management and sale of allowances should be subject to oversight by the State and local boards of customer-owned utilities, and allowances should be sold to LSE-owned and merchant generation on a non-discriminatory basis.

In addition to achieving the goal of mitigating consumer and business costs, the allocation of allowances among different sources of emissions should help achieve the other public policy objectives listed above. For example, by allocating allowances based on a metric that rewards efficiency, as suggested in the California Market Advisory Committee Report, as opposed to one that continues to support the use of higher-emitting, less efficient resources, the allocation approach can send appropriate investment signals and simultaneously address and encourage early action and avoid delayed clean-up of existing sources. One method by which to do this would be to allocate allowances based on an output metric such as retail sales, adjusted for verified energy efficiency savings.

We believe the allocation methodology used under AB 32 can serve as a model for regional and national programs. And, as the regional and national discussions move forward and begin to address the critically important issue of allowance allocation, these policymakers will be taking their cues from decisions made and signals sent by California.

Thank you for the opportunity to address the Committee. Climate change is one of the most pressing issues of our time, and PG&E is committed to being part of the solution. We look forward to working with the State to make AB 32 a success and to serve as a model for others to follow.