AMERICAN PUBLIC POWER ASSOCIATION

2004 Legal Seminar

Green Energy – Legal Considerations and

New Developments

Presenter: Arlen Orchard

General Counsel

Sacramento Municipal Utility District

A. Drivers Behind Public, Legislative and Regulatory Interest in Green Energy.

1. Environmental Concerns

a. Greenhouse gases and climate change

(i) August 2004 Report to Congress

Emissions of carbon dioxide and other heat trapping gases are

the only likely explanation for global warming

(ii) The United States accounts for 25% of global greenhouse gas

emissions—emission increased 11.9% between 1990 and 2001i

(iii) In California electricity generation is the second largest source

greenhouse gases behind transportation sector. ii

(iv) Extensive media coverage. Iii

b. California Energy Commission 2003 Report on Climate Change and

California

2. Fuel Source Diversity

a. Reduce dependence on fossil fuels.

b. In California sense that fuel diversity will promote stable electricity

prices while improving environmental quality.iv

c. Rising natural gas costs may make green energy more competitive.

B. Can’t Talk Green Energy Without Talking Renewable Portfolio Standard

1. RPS Theory

a. Market-based policy to encourage the development and incorporation

of cost-competitive renewable energy into the mainstream energy

markets.v

b. Obligates retail electricity sellers to include a determined percentage of

renewable energy in their resource portfolios.vi

c. RPS can be satisfied through facility ownership, purchase power

contracts or tradable renewable energy credits. vii

2. Federal RPS

a. Senate Version of the Energy Bill

(i) 10% of retail electricity sellers portfolio required to be green by

2010

(ii) Public Power exempted.

(iii) Renewable energy defined to include biomass, solar, wind, ocean,

geothermal, landfill gas, incremental hydro.

(iv) Civil penalties for non-compliance.

b. Disagreement with the House of Representatives

(i) Federal RPS stalled.

3. California RPSviii

a. Anticipated 1% increase per year – 20% by 2017

b. Investor-owned utilities pay no more than market cost for renewables.

(i) Above market-costs to be funded Public Goods Charge funds

administered by the California Energy Commission.

(ii) Appropriate benchmark for “market-cost” is a matter of dispute

ranging from forward energy price curves to actual costs of new

power generation.ix

c. Contempt penalty for non-compliance.

d. Public Power exempt.

(i) Governor’s vetoed Senate Bill 1478 because the bill omitted Public

Power from the RPS requirements. x

(ii) New legislation to apply RPS to Public Power expected in 2005

e. Many California Public Power entities have adopted a local RPS.

(i) SMUD – 10% by 2006 and 20% by 2011.

(ii) LADWP – 20% by 2017.

(iii) Small public power entities face hurdles in adopting an RPS,

including budget and resource constraints.

4. Other States

a. 17 States have some form of RPS.

b. Requirements vary from State to State.

(i) Table C-1. State Minimum Renewable Electricity Requirements.

c. Enforcement of RPS vary from State to State.

(i) California: flexible rules for compliance—on an annual basis

limited to availability of funds.xi

(ii) Texas: Failure to comply with RPS target—financial penalty of

$50/MWh.

(iii) Nevada: PUC may impose financial penalties for non-compliance.

(iv) Wisconsin: Fines up to $500,000 for non-compliance

d. 15 States have some level of public benefit funding for renewable

energy (10 States have both RPS and public benefit funding).

(i) Table D-1. State Public Benefits Funding for Energy Efficiency,

Renewables, and R&D.

e. Active debate in several States regarding adoption of an RPS.

17 states – CA, HI, IA, MD, MN, NY, RI,

WI outside of restructuring

CO, DE, IL, PA up next?

WI: 2.2% by 2011

IA: 2% by 1999

MN: 19% by 2015*

NV: 15% by 2013, solar 5% of total annually

TX: 2.7% by 2009

NM: 10% by 2011

AZ: 1.1% by 2007, 60% solar

Union of Concerned Scientists

Renewable Electricity Standards

CA: 20% by 2017

* MN has a minimum requirement for one utility, Xcel.

HI: 20% by 2020

CT: 10% by 2010

RI: 16% by 2019

ME: 30% by 2000

PA: varies by utility

NJ: 6.5% by 2008

MD: 7.5% by 2019

MA: 4% by 2009

NY: 24% by 2013

Cumulative 1998-2017

$114 mil

RI: $30 milMA: $494 mil

CT: $248 milNJ: $286 mil.

$89 mil

$67 mil.

$21 mil

$200 mil

$2,048 mil

$95 mil.

$14 mil

Union of Concerned Scientists

Renewable Energy Funds

$234 mil. 15 state funds = $4 billion by 2017

10 states with funds & standards

DE: $18 mil.

$25 mil.

5. Related Green Energy Issues.

a. 17 States require public disclosure of fuel mix.

(i) Purpose to build public awareness.

b. 38 States have some form of net metering, which promote non-utility

renewable ownership.

(i) California: Up to 1 MW for solar and/or wind.xii

c. Greenergy – Voluntary Retail Program

(i) Customers pay a premium for utility to match electricity needs

with renewable sources.

(ii) SMUD: Third largest in nation—more than 28,000 residential

customers (6% of residential customers) and more than 700

commercial customers.

(iii) Cannot normally be used to meet RPS.

Union of Concerned Scientists

Fuel Mix and EmissionsPublic Disclosure

• 23 States + Washington D.C.

Fuel Mix Only

Both

Union of Concerned Scientists

Net Metering Programs

ME: 100 kW

*

40 kW

*

*

MD: 80 kW

CT: 100 kW

RI: 25 kWMA: 60 kWNH: 25 kW

No limit50 kW

NY: 10 kW, 400 kW for biogas

40kW

20 kW

No limit

1,000 kW

10 kW

50 kW

10 kW10 kW

30 kW

25 kW

25 kW

25 kW

50 kW 100 kW

38 states

*

25 kW

HI: 50 kW

*

25 kW

OK: 100 kW or 25,000 kWh* IN: 10 kW and 1,000 kWh/month

VT: 15 kW, 150 kW for farm systems

VA: 10 kW (res.); 500 kW (comm.) GA: 10 kW (res.); 100 kW (comm.)AR: 25 kW (res.); 100 kW (comm.)

15 kW

LA: 25 kW (res.); 100 kW (comm. or ag.)

DC: 100 kW

*

10 kW

RI: 25 kWNJ: 100 kW

DE: 25 kW

State-wide Programs

Individual Utilities

C. Defining Green Energy/Renewable Energy.

1. No industry or common regulatory definition.

a. California: biomass, solar thermal, photovoltaic, wind,

geothermal, fuel cells using renewable fuels, small hydro

(30 MW or less), digester gas, municipal solid waste conversion,

landfill gas, ocean wave, ocean thermal.xiii

(i) Must be located in the state or near border with the

first point of connection to the Western Electricity

Coordinating Council (WECC) transmission system

located within California.xiv

(ii) Additional limits on geothermal and small hydro. xv

b. Other States.

(i) Table C-1, State Minimum Renewable Electricity

Requirements.

c. Green-e Renewable Electricity Certification Program.

(i) Green-e program is administered by the non-profit Center

for Resource Solutions, which certifies renewableelectricity products that meet the environmental andconsumer protection standards established by theprogram.

(ii) Retail sellers with qualifying renewable products may seek

certification and use the Green-e logo for marketingpurposes.

(iii) Solar electric, wind, geothermal, and biomass that havecome on line since 1997.

d. Consumer (Utility) Confusion.

(i) Clean energy, renewable energy, alternative energy, green

energy, Green-e energy.

e. Need for Standard Definitions.

(i) Consumer awareness.

(ii) Clarity in contracts.

(iii) Development of tradable renewable energy certificates

program.

D. Renewable Energy Certificates

1. Renewable energy creates two distinct commodities: the

underlying electricity and the associated “non-energy” or

“environmental” attributes

a. RECs represent a contractual right to the non-energy

attributes associated with a specific amount of

generation.

b. RECs may be bundled with or unbundled from the

underlying electricity.

2. FERC: “[C]ontracts for the sale of qualifying facility capacity and

energy entered into pursuant to PURPA do not convey renewable

energy credits or similar tradable certificates (RECs) to the

purchasing utility (absent express provisions in a contract to the

contrary) . . . a state may decide that a sale of power at wholesale

automatically transfers ownership of the state-created RECs,

that requirement must find its authority in sate law, not

PURPA.”xvi

a. Draft power purchase contracts to include RECs and any

other environmental attributes.

b. California Senate Bill 1478 would have prohibited RECs on

power purchase contracts executed before January 1, 2005

(vetoed).

E. Creation of an REC Trading System.

1. June 2002, the Western States Governors formally expressed

support for: (1) “creation of an independent, regional generation

tracking system to provide data necessary to substantiate the

number of megawatt hours generated from renewable energy

sources and support verification, tracking and trading of RECs;”

and (2) “establishment of a single institution in the West that will

issue, track and oversee REC trading.”xvii

2. Western Renewable Energy Generation Information System

(WREGIS).xviii

a. Sponsored by the Western Governors’ Association, the

California Energy Commission, and the Western Regional

Air Partnership. Intended to be policy neutral.

b. Voluntary system designed to track renewable generationenergy in the WECC.

c. Electronic tracking system is essential to support the trading

of RECs and the development of a viable REC market.d. WECC will serve as the institutional home for WREGIS.e. Operation Goal: Online in 2005.

3. Purpose of WREGIS.

a. Verify renewable energy generation within the WECC.b. Create RECs with unique green tag numbers.c. Allow generators, utilities and other market participants to

establish active REC and retirement accounts.d. Track wholesale renewable energy transactions involving

RECs.e. Verify ownership, trading and retirement of RECs.f. Allow regulators to track RECs.

4. Benefits of WREGIS.

a. Expand the marketplace for Western generated renewable

energy.

b. Increase liquidity and efficiency of a renewable energy market

in the West.

c. Support RPS in the West.

d. Increase consumer awareness and confidence in renewable

energy markets.

5. What WREGIS does not accomplish.

a. Does not provide a common definition for renewable energy.

b. Differing standards among states may make a regional market

overly complex and fragmented

____________________

iRobert Nordhaus & Kyle Danish, Designing a Mandatory Greenhouse Gas Reduction Program for the U.S., Pew Center on Global Climate Change (2003), citing Energy Information Administration, U.S. Department of Energy, Emissions of Greenhouse Gases in the United States, DOE/EIA-0573 ix (Dec. 2002).iiCalifornia Energy Commission, Climate Change and California, 2003 Integrated Energy Policy Report Proceeding, Docket #02-IEP-01 (Nov. 2003).iiiSee Sacramento Bee, Nov. 5, 2004, Administration battles to soften report on curbing Artic warming, describing Bush administrations efforts to influence eight-nation report that Arctic latitudes are “facing historic increases in temperature, glacial melting and weather changes.”ivSee Cal. Pub, Util. Code § 399.11 (2004). vKevin Golden, Comment, Senate Bill 1078: The Renewable Portfolio Standard – California Asserts Its Renewable Energy Leadership, 30 Ecology L.Q. 693, 699 (2003).viId.viiNancy Rader & Scott Hempling, Nat’l Ass’n of Regulatory Util. Comm’rs, The Renewable Portfolio Standard: A Practical Guide 1 (2001).viiiSen. Bill No. 1078, 2001-2002 Reg. Sess. (CA 2001-2002).ixGolden, supra note v, at 708.

____________________

xSenate Bill 1478 sought to revise the California RPS to shorten the timetable for achieving a 20% RPS to 2010 and increase the ultimate RPS goal to 33% by 2020. SB 1478 also sought to create a renewable credit market that the Governor found to include several onerous restrictions.xiCal. Pub. Util. Code §§ 399.14(a)(2)(C), 399.15(b)(4) (2004).xiiCal. Pub. Util. Code § 2827 (2004).xiiiCal. Pub. Util. Code §§ 383.5, 399.12 (2004). xivCal. Pub. Util. Code § 383.5 (2004).xvSee Cal. Pub. Util. Code § 399.12 (2004).xviAmerican Ref-Fuel Company, et al., 105 FERC P 61,004 (2003).xviiCALIFORNIA ENERGY COMMISSION and WESTERN GOVERNOR’S ASSOCIATION, NEEDS ASSESSMENT FOR A WESTERN RENEWABLE ENERGY SYSTEM FINAL REPORT (Dec. 2003). xviiiSee CALIFORNIA ENERGY COMMISSION, ACCELERATED RENEWABLE ENERGY DEVELOPMENT, 2004 INTEGRATED ENERGY POLICY REPORT UPDATE PROCEEDING, Docket # 03-IEPR-01 (July 2004); available at http://www.energy.ca.gov/2004_policy_update/documents/2004-08-23_workshop/2004-07-03_100-04-003D.PDF.