Comment Log Display

August 5, 2008	VIA ELECTRONIC FILING




Ms. Mary Nichols, Chairman
CALIFORNIA AIR RESOURCES BOARD 
1001 I Street
Sacramento, CA  95812-2828

Mr. James Goldstene, Executive Officer
CALIFORNIA AIR RESOURCES BOARD
1001 I Street
Sacramento, CA  95812-2828

Mr. Chuck Shulock, Chief
Office of Climate Change
CALIFORNIA AIR RESOURCES BOARD
1001 I Street
Sacramento, CA  95812-2828

Re: 	Pacific Gas and Electric Company’s Comments on the AB 32
Draft Scoping Plan

Dear Chairman Nichols and Messrs. Goldstene and Shulock:
Pacific Gas and Electric Company (“PG&E”) welcomes the opportunity
to provide these initial comments on the California Air Resources
Board’s (“ARB”) June 2008 Draft AB 32 Scoping Plan (“Draft Plan”).
 Our comments are summarized in this letter and are set forth more
fully in the attached document.  Although PG&E addresses the Draft
Plan’s overall approach and strategy, please consider these
comments preliminary as we await the ARB’s Supplemental Analyses
and continue our review of the Technical Appendices released on
July 22, 2008.  In particular, we believe that further analyses of
the technological feasibility and cost effectiveness of the
proposed measures will be essential to allow meaningful public
evaluation of the Draft Plan and its impacts.
 
PG&E and our customers share California’s desire to continue
leadership on climate change, and this is why we were the first
investor-owned utility to support enactment of AB 32.  PG&E is a
gas and electric utility serving one in twenty Americans and is
committed to leadership on climate change.  Our customers have
invested and continue to invest in customer energy efficiency
(“CEE”) programs and a clean electric generating portfolio, so
that our emissions are among the lowest of any utility in the
nation.  During the 2009   2011 period alone, PG&E expects to
spend nearly $1.9 billion of customer funded revenue for various
CEE programs that will save more than 5,784 gigawatt hours of
electricity and 108 million therms of natural gas annually.  The
GHG emissions associated with the electricity we provide are among
the lowest of any large utility in the country, approximately 40%
of the CO2 emitted by the average utility.  Currently, over 50% of
the electricity PG&E delivers to its customers comes from sources
that emit no greenhouse gases at all.

PG&E approaches AB 32 implementation guided by five key
objectives: 

1.	Ensure environmental integrity through adoption and use of
mandatory, real and verifiable reductions;

2.	Manage costs to California consumers and businesses by pursuing
cost-effective and technologically feasible reduction strategies
and a consumer-oriented allowance allocation approach; 

3.	Solidify 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;

4.	Equitably apportion reduction obligations to ensure that all
sectors pay their fair share.  State-wide reduction obligations
should be apportioned to ensure that no single source, sector, nor
its customers, assumes a disproportionate cost burden; and

5.	Rely as much as possible on market and flexible compliance
mechanisms to encourage and accelerate the most efficient,
cost-effective pathway to sustainable, available emission
reductions across all sectors.

With these objectives in mind, the following highlights some of
our initial over-arching comments on the Draft Plan.

A.	The Draft Plan Properly Takes a Comprehensive Approach To
Achieving GHG Reductions.

AB 32 calls for ARB to consider three critical questions as it
implements measures to meet the AB 32 goals:

1.	Will the emissions reduction measures work?  For example, are
they technologically feasible?

2.	Are the emissions reduction measures cost-effective?  For
example, is each measure cost-effective compared to alternative
measures or programs that could be undertaken to achieve the same
quantity of reduction?

3.	Are the emissions reduction measures fair and equitable when
compared to the relative contribution of each source and sector to
overall GHG emissions in California?

PG&E recognizes - as does the ARB itself - that the Draft Plan is
preliminary in this respect and that a more complete plan will
come later this year.  We look forward to working with ARB to
better define these key issues in the coming months.

 It is often said that there is no “silver bullet” to address the
challenge of climate change and that is why it is critically
important for California to pursue all “technologically feasible”
“cost-effective” options to achieve the AB 32 emission reduction
targets.  The Draft Plan takes an important first step toward this
comprehensive approach, relying on a wide range of measures,
including market mechanisms and programs.

B.	PG&E Supports the Draft Plan’s Endorsement of Cap and Trade
Market Mechanisms to Achieve Verifiable, Timely, and
Cost-Effective GHG Reductions.

PG&E supports and commends the ARB’s conclusion that a properly
designed, multi-sector cap and trade program (and one ideally
linked to the Western Climate Initiative (“WCI”)) can achieve
real, quantifiable, timely, and cost-effective GHG reductions
(Draft Plan, p. 15).

Cap-and-trade leverages market forces to pursue and implement the
least-cost reductions.  Effective use of market mechanisms will
drive the development of the next generation of clean,
highly-efficient technologies and practices.  Indeed, the
challenge demonstrated thus far in accurately determining cost
effectiveness for a limited number of well established measures
illustrates why cap-and-trade is a superior approach for
delivering the most cost-effective reductions.  As required by AB
32, integration with WCI or a national program will also begin to
provide the necessary harmonization of California’s market with
emerging regional, national and, ultimately international carbon
trading programs.  Although AB 32 requires that any cap-and-trade
program either must be “necessary” or “desirable” – we believe it
is both.  (HSC § 38561(b).)  A well-designed market is “necessary”
for leveraging lower cost reductions and “desirable” for spurring
innovation that may not come from traditional regulatory
programs.

 
C.	The Scoping Plan Must Include Cost Effectiveness and
Technological Feasibility as Criteria for Evaluating Reduction
Measures.

PG&E supports several of the Draft Plan’s criteria for developing
preliminary recommendations for GHG reduction measures, such as:
“Achieve the 2020 Cap”; “Maximize economic benefits and minimize
economic harm;” and “Provide leadership and influence other
governments;” and “Assure that emissions reductions required of
each sector are equitable” (Draft Plan, pp. 49, 50).  We believe
it critical, however, for the final Scoping Plan to include
cost-effectiveness and technological feasibility as core criteria
for evaluating GHG reduction measures as required by the AB 32
statute (HSC § 38561(a)).  We look to the final Plan to more
expressly evaluate cost effectiveness and technological
feasibility across all sectors and sources and provide data and
analyses to support each of the recommended reduction measures.

D.	Due to Uncertainties Associated With Some Programmatic
Measures, the Draft Plan Should be Open to Greater Reliance on the
Broader Trading Market for Cost-Effective Emission Reductions.

As noted above, we support a comprehensive, multi-faceted approach
to achieving AB 32’s targets.  It will take much effort across the
California economy to achieve the ambitious objectives called for
by AB 32.  We note, however, that the Draft Plan relies heavily on
uncertain and potentially infeasible programmatic and regulatory
targets.  Further, we believe that an over-emphasis on fixed
programmatic measures or regulatory programs could come at the
expense of developing a more robust and efficient regional,
national, and ultimately international trading market, where more
cost-effective reductions could potentially be found.

Although we share the goal of increased renewables, there are a
number of critical issues beyond our control that must be
resolved:  (1) adequacy of supply; (2) adequacy and availability
of transmission infrastructure; (3) how to integrate new renewable
resources into the grid and manage over generation; and (4) renewal
of existing federal Production Tax Credits (“PTC”) and Investment
Tax Credits (“ITC”).  For example, regardless of our shared
commitment to increased renewables, if ITC and PTC are not
extended, some developers may face significant delays or simply
not be able to proceed with their projects.  While PG&E agrees
that the state must address the barriers to 33% now, we believe it
is extremely optimistic - given these challenges - to assume a
specific level of GHG reductions associated with a greatly
increased RPS at this time.

Likewise, an expansion of CHP electric generation sources is only
a GHG reduction measure if the additional CHP has true efficiency
advantages and is matched against existing thermal load.  Based on
currently available information, PG&E questions whether capacity
exists for the 30,000 GWH of CHP assumed by the Draft Plan to
represent GHG reduction opportunities.  Cost-effective and
efficient CHP in reasonable quantities should need no supporting
mandates, as both the industrial sector and the electricity sector
will be part of the cap-and-trade market.  Indeed, regulatory
mandates for CHP could conceivably increase GHG emissions by
encouraging inefficient CHP, while a market-based mechanism such
as cap-and-trade would provide sufficient incentive for efficient
CHP where “business as usual thermal load” exists.

The CEE targets assumed by the Draft Plan rely on extraordinarily
ambitious government action, technology advancement, market
transformation, and unprecedented customer adoption and rebate
levels.  The numbers being relied upon in the 2012 – 2020 Plans
issued by the California Public Utilities Commission are scheduled
to be adjusted in 2010 and we would anticipate costs to increase
substantially.  The ARB must consider and rigorously evaluate
these uncertainties in the Draft Plan CEE targets and consider a
broader range of emissions reductions associated with CEE.  Most
important, if the state is to achieve its CEE targets, it is
essential that all utilities – both investor owned (“IOU”) and
publicly owned (“POU”) – contribute their fair share of CEE
savings.  Additional targets for CEE should be applied first to
POUs before looking to expand already ambitious IOU programs. 
Finally, government codes and standards must be rigorous and
strictly enforced if we are to realize projected CEE savings.

PG&E is committed to our current leading energy efficiency and
renewables programs, but significantly increased CEE, renewables
and CHP mandates with specific, set-aside targets should be
de-emphasized when outcomes are so uncertain, technologies are yet
to be developed, and costs are indeterminate.  As mandates offer
little choice in how to meet goals, they should be based on
realistic and accepted methodologies.  Again, ARB may want to
consider greater reliance on the ability of the market to deliver
cost-effective, innovative, and substantial emission-reduction
opportunities and less reliance on programmatic measures where
California and California’s businesses are already taking a bold
leadership.  By leveraging these market forces to achieve
reductions in a cost-effective manner, the Draft Plan will serve
more nimbly and effectively as a map with multiple roads to
achieving targets in 2020 and beyond.

E.	The Draft Plan May Place an Inequitable and Unfair Burden on
the California Electric Sector and its Customers.

State-wide reduction obligations should be apportioned under AB 32
to ensure that no single sector, nor its customers, assumes a
disproportionate cost or quantitative burden relative to their
contribution to state-wide emissions.  For example, PG&E is
concerned that the Draft Plan may place an inequitable compliance
burden on utility sector customers by imposing programmatic
measures that have not been shown to be cost-effective or
technologically feasible.

In this regard, AB 32 requires ARB to adopt a regulatory program
that “takes into account the relative contribution of each source
or source category to statewide greenhouse gas emissions,” and
“consider[s] the significance of contribution of each source or
category of sources to statewide emissions of greenhouse gases”
and “design the regulations . . . in a manner that is equitable”
(HSC §§ 38561(e), 38562(b)(1) and (9)).

PG&E believes ARB should approach the issue of inter-sector equity
by ensuring that all sectors bear their fair share of overall GHG
reduction costs, based on relative contributions to overall
emissions regardless of which sector actually performs the
reductions.

F.	The Use of Environmentally Sound and Verifiable Offsets Will be
Necessary to Meet AB 32’s Targets in a Cost-Effective Manner.

PG&E strongly supports the use of offsets as an indispensable tool
for reducing GHG emissions outside a cap-and-trade system while
controlling the costs of regulated firms complying with emissions
targets.  To this end, it is important to maintain a balance
between supply and demand and to ensure that sufficient liquidity
is available in the cap-and-trade market.  These objectives will
be better achieved with a higher availability of quality offsets.

A robust offset program, governed by rigorous standards, will
ensure reductions achieved outside the cap are environmentally
equivalent to those that occur at emission sources subject to the
cap.  Offset protocols should be thorough; and qualifying projects
that meet the protocol standards should not be subject to further
case-by-case review or discounting.  PG&E also believes that
ensuring high quality offsets should be our collective focus.  In
that spirit, the Draft Plan should clearly signal that -- as long
as the offsets meet rigorous standards -- there should be no
geographic or quantitative limits on their use for compliance
purposes.

G.	A Successful Cap-and-Trade Program Will Need to Address Key
Design Issues Including Allowance Allocation, Cost-Containment
Mechanisms, and Apportionment of Emissions Responsibility.

PG&E commends the ARB for its decision to include a cap-and-trade
program as one of the measures in the Draft Plan.  As the agency
continues to work with the California Public Utilities Commission,
the California Energy Commission, the 23 other states and provinces
participating in the WCI process, as well as the other important
stakeholders, we look forward to more details and principles for
design of the trading program.  For example, by incorporating
cost-containment mechanisms, such as an allowance price “collar”
under a cap-and-trade program, policymakers and stakeholders can
ensure that long-term emission reduction goals are met, while at
the same time providing for an orderly transition to a low-carbon
economy through a greater degree of price predictability and
reduced price volatility.

For electric sector participation in a cap-and-trade program, PG&E
supports the distribution of allowance value for the benefit of
electricity consumers, while promoting investment in new
low-carbon technologies or programs that also benefit customers
and the communities we serve.  This is because households and
businesses at the end of the electricity supply chain, regardless
of the point of regulation, will ultimately bear the costs - in
the form of higher electricity prices - of a GHG cap-and-trade
program.  This is fully consistent with AB 32’s requirement that
good-faith efforts to be made to make opportunities available to
disadvantaged communities in California to benefit from measures
undertaken to reduce GHG emissions in the state (HSC § 38565). 
This is particularly important because low-income earners are a
large and growing segment of California’s population.  Therefore,
electricity consumers should be entitled to the value inherent in
the allowances in order to partially offset increased costs, as
well as provide capital to help these consumers transition to a
low-carbon economy.

Finally, the design principles for a regional or WCI-based
cap-and-trade program should include details on how California
intends to apportion its compliance responsibility among all the
states in a regional cap-and-trade program.  This becomes
particularly important for GHG emissions sources located outside
California, such as coal- and gas-fired power plants who export
their power to California but whose emissions would be regulated
directly by the states in which they are located.

H.	The Draft Plan Inputs and Analyses of Technological Feasibility
and Cost Effectiveness Must be Clear and Available to the Public As
Soon as Possible. 

	PG&E understands that the modeling and analyses of cost
effectiveness and technological feasibility are to be addressed
and provided to the public in supplemental information prior to
issuance of the next iteration of the Draft Plan.  However, in
light of the great importance of these analytical and modeling
issues, we provide initial input in the attached comments
regarding possible ambiguities and deficiencies in the assumptions
in the Draft Plan.  Taken together, correcting these numbers would
decrease the GHG reductions associated with the measures by
millions of tons.  The reductions are in addition to, and distinct
from, the uncertainties in implementing the measures described
above further underscoring the increased role market-based
mechanisms may need to play in meeting AB 32’s goals.

 
	Thank you for the opportunity to submit these comments.  We look
forward to working constructively with ARB, other state agencies,
concerned stakeholders, and members of the public to tackle the
challenge of global climate change and to ensure the successful
implementation of AB 32.

Very truly yours,

/s/

JOHN W. BUSTERUD

JWB:kp

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