Comment Log Display

Shell Energy North America (US), L.P. (“Shell Energy”) provides its
comments on the Staff’s September 4, 2013 proposed amendments to
the Air Resources Board (“ARB”) Cap and Trade Regulations.  Shell
Energy submitted comments jointly with Shell Oil Products US
(“SOPUS”) on August 2, 2013, in response to the “Discussion Draft”
of proposed amendments that was released by the ARB Staff on July
15, 2013.  Unfortunately, upon review of the September 4 proposed
amendments, it appears that most, if not all, of these comments
were ignored.  Shell Energy requests that the ARB consider the
comments herein on specific proposed amendments to the Regulations
in view of the importance of these issues to an efficient and
effective regulatory structure.  In particular, the ARB should
strike or withdraw proposed amendments that would impose
unreasonable and unnecessary burdens on covered entities, as well
as proposed amendments that would interfere with existing
contracts.
Shell Energy’s comments, which track specific sections of the
proposed amendments, are as follows:
1.	Section 95830(c)(1)(H):  The Staff’s proposed amendment provides
that a registered entity must identify every other entity with
which the registered entity has a “corporate association,” a
“direct corporate association,” or an “indirect corporate
association,” as defined in Section 95833(a), whether or not the
entity is registered with or intends to register with the ARB. 
This proposed requirement is unreasonable and unduly burdensome. 
As Shell Energy noted in its August 2 comments, large
multi-national corporations such as Royal Dutch Shell have
hundreds, if not thousands, of affiliates that would meet the
definition of either a “direct” or an “indirect” corporate
association.  It would serve no useful purpose for a large
corporation to disclose all of these entities, unless the entities
intend to register with the ARB.  For purposes of compliance with
the Cap and Trade Regulations, it should be enough for a registered
entity to identify all related entities that are “registered” with
the ARB, or registered with a “linked” External Greenhouse Gas
Emissions Trading System.  Inquiry into a direct or indirect
corporate association with an entity that is not so registered is
neither appropriate nor necessary.
The “Staff Report:  Initial Statement of Reasons” (“Staff Report”)
states that the proposed language requiring disclosure of all
“corporate associations,” “direct corporate associations” and
“indirect corporate associations” “is a clarification [of] an
existing requirement and not a new requirement or change in
policy.”  Staff Report at p. 112.  Regardless of whether or not
this is a “change” to an existing requirement, the proposed
language should be stricken.  As Shell Energy noted in its August 2
comments, the purpose of the “corporate association” rules is to
place purchasing limits and holding limits on entities that are
registered with the ARB (or a “linked” Trading System) and that
have a “direct corporate association.”  No reasonable justification
exists to disclose an entity’s “corporate association” with an
entity that is not participating in the Cap and Trade program.  The
Staff has not provided a reasonable basis for this requirement. 
This proposed amendment should be stricken or withdrawn.
2.	Section 95830 (c)(1)(I), (J):  The Staff Report states that new
Section 95830(c)(1)(I), which would require registered entities to
disclose the names of all persons employed by the entity in a
capacity that would give them knowledge of the entity’s decisions
on compliance instrument transactions or holdings, is needed to
identify individuals who gain knowledge of a registered entity’s
transaction strategy through their work as employees of a
registered entity.  See Staff Report at pp. 104-05.  Similarly, the
Staff Report states that Section 95830(c)(1)(J) is needed to
disclose the identities of registered entities’ auction bidding
advisors or consultants for Cap and Trade activities. The Staff
states that the new language would add disclosure requirements for
individuals who gain knowledge of a registered entity’s compliance
and transaction strategy through their work as consultants. The
Staff states that because these individuals may serve as
consultants for multiple registered entities, disclosure is needed
to enable the ARB to monitor for “collusive activity.”  Staff
Report at p. 105.
The proposed language in these two sections is overbroad and unduly
burdensome.  In a large corporate organization such as Royal Dutch
Shell, this proposed language, if adopted, could require disclosure
of numerous individuals that are only tangentially involved in the
Cap and Trade program, including individuals in foreign countries. 
Moreover, the Staff’s failure to provide clear limits regarding the
required disclosure would make it difficult to comply.
Shell Energy suggests that the ARB withdraw the proposed amendment
and replace it with a provision that requires a registered entity
to adopt a policy that prohibits its employees (and their family
members) from trading products in personal accounts that the
company trades or originates as part of its business. 
Alternatively, Shell Energy recommends that the ARB narrow the
proposed language to require disclosure of employees and
consultants who have been delegated authority to commit the company
to purchases and sales of compliance instruments, and who have
access to the entity’s CITSS account.  The regulation could further
require an attestation by any individual who seeks to register,
that the individual’s family members are not employees of a
registered entity.  
3.	Section 95833(a)(2)(F):  The Staff’s proposed amendment includes
a “limited liability corporation” within the meaning of a “direct
corporate association,” if one entity owns more than 50 percent of
the other entity.  Shell Energy does not object to including
limited liability corporations (“LLC”) within the meaning of the
disclosure rules.  However, it is not enough to establish a “direct
corporate association” with an entity by showing that the entity
owns more than 50 percent of the LLC.  In order to establish the
level of “control” that is required for a direct corporate
association, the terms of the LLC’s operating agreement must be
considered.  This consideration should be added to the amended
language.
4.	Section 95856(h):  The Staff’s proposed amendment establishes
the “order” or “priority” in which a covered entity’s compliance
instruments will be retired.  The Staff states that this provision
is necessary “because it provides participants with details
regarding the order in which compliance instruments will be
considered by the Executive Director for compliance with the annual
surrender event.”  Staff Report at p. 138.  The proposed amendment
to order (prioritize) the retirement of compliance instruments
should be modified to provide that the Executive Director will only
dictate the order in which a covered entity’s compliance
instruments are retired if the covered entity has not otherwise
designated the order in which the instruments are to be retired.  
The Staff Report states, for example, that “allowances from
California and linked jurisdictions will be the third type of
compliance instrument to be considered in the Compliance Account .
. . based on earliest vintage first.”  Staff Report at p. 139.  For
 a variety of reasons (including but not limited to corporate
taxation and financial accounting), however, the covered entity may
prefer to retire “offsets,” or compliance instruments with a more
recent vintage ahead of instruments with an older vintage.  One
reason for this is that most companies recognize their free
allocations at $0 on their balance sheet, but recognize purchased
allowances at “cost.”  A company may wish to retire all of its
freely allocated Vintage 2014 allowances before the company retires
its purchased Vintage 2013 allowances, in order to optimize its
balance sheet.  The proposed Compliance Instrument Retirement Order
would not permit this.  
The order in which a covered entity’s compliance instruments are
retired should be within the discretion of the covered entity (both
for its annual compliance obligation and its triennial compliance
obligation), with the possible exception of “true-up” allowances,
as provided in Section 95856(h)(3).  The Executive Director should
only prescribe the order of retirement as the “default.”
5.	Section 95912(d)(4)(C), (D):  The proposed amendment would
require a covered entity’s auction participation application to
include an allocation of the “purchase limit” and the “holding
limit” among members of a “direct corporate association” as defined
in Section 95833.  The Staff states that the purpose of this
provision is to require covered entities to report any change in
the distribution of the purchase limit and/or the holding limit
among corporate associates.  Staff Report at p. 176.  Whether or
not this proposed amendment is adopted, each of the covered
entities with a “direct corporate association” that is subject to
the purchase limits and the holding limits should be permitted to
establish its own subaccount for compliance and retirement in
accordance with Section 95856(c), and should be allowed to transfer
compliance instruments between and among the compliance accounts
for each covered entity, subject to the overall holding limits. 
This approach provides entities that have a direct corporate
association, and that are subject to the purchase and holding
limits, greater flexibility in the timing and allocation of
compliance instruments for retirement.  The Regulation should be
amended to include a provision that allows covered entities to
establish their own subaccounts for compliance and retirement as
discussed above.
6.	Section 95912(d)(4)(E):  The Staff’s proposed amendment to the
items that must be included in the “application” for auction
participation would require an attestation that the entity
participating in the auction, “and all other entities with whom the
entity has a corporate association, direct corporate association,
or indirect corporate association” (pursuant to Section 95833) has
not been subject to “any previous or ongoing investigation with
respect to any alleged violation of any rule, regulation or law
associated with any commodity, securities, or financial market . .
. .”  The Staff states that this new provision is needed “to
improve ARB’s ability to monitor investigation of alleged
violations in other financial markets . . . .”  Staff Report at p.
176.  
This proposed amendment is overreaching and unreasonable.  Under
Section 95833(a)(4), an “indirect” corporate association can be
established with an ownership interest that is no more than 20
percent.  It is unreasonably burdensome to require the applicant to
undertake the research to ascertain whether an entity with an
“indirect corporate association” is the subject of an allegation of
wrongdoing under financial market rules.  If such a disclosure
requirement is to be imposed, the requirement should be limited to
entities with which the applicant has a “direct corporate
association.”  This proposed amendment should be modified or
stricken.
7.	Section 95920(a):  As Shell Energy stated in its August 2
comments, the “holding limit” (for entities with a direct corporate
association) referenced in this section of the Rules is
unreasonably low.  The holding limit fails to take into account the
nature of a covered entity’s business.  Different holding limits
should be established based on the type of business in which the
entity is engaged.  The current limits are punitive, especially for
companies that have large compliance obligations and/or large
purchase commitments by virtue of new or existing contractual
arrangements.  This latter point (new or existing contractual
arrangements) is particularly important, because the limited
exemption offered by the Compliance Account does not help an entity
that has to transfer large volumes to a third party by virtue of
some separate contractual arrangement.  The holding limits should
be re-examined.
8.	Section 95921(b)(3)(C), (4)(E,F,G), (5)(E):  The Staff’s
proposed amendment would require disclosure of the price term in a
transfer request for the sale of compliance instruments, whether
the transaction is over-the-counter or an exchange-based agreement.
 The Staff’s proposal would require disclosure of a “fixed price”
or, in the alternative, a description of the pricing method in the
secondary market transaction.  The Staff attempts to justify a
“price disclosure” requirement by stating that the “provision is
needed to enable ARB market monitoring staff to understand the
basis for pricing carbon instruments.”  Staff Report at p. 200. 
The Staff also asserts that the “provision is needed to allow ARB
to interpret the price entered for the transfer request as part of
market monitoring.”  Id. 199.  
The Staff’s reasoning does not justify a price disclosure
requirement; disclosure of the price of a private transaction is
not supported by law.  The ARB does not approve or regulate the
prices of compliance instruments that are sold in secondary market
transactions.  The ARB also does not regulate or limit the price
that an entity may charge to sell, or pay to purchase compliance
instruments in the secondary market.  Secondary market price
regulation is outside the scope of the ARB’s authority under AB 32.
 The ARB does not have the authority to require mandatory price
disclosure as a part of a participating entity’s “transfer
request.”
As Shell Energy stated in its August 2 comments, mandatory price
disclosure to the ARB would risk the potential for public
disclosure (inadvertent or through a Public Records Act request),
which could in turn inhibit or distort competition in the secondary
market.  The secondary market for compliance instruments can and
should be a robust and competitive market.  Price disclosure could
have a chilling effect on secondary market transactions.  
In this connection, a “liquid” secondary market is dependent on a
large volume of trades.  Requiring price disclosure for secondary
market transactions would reduce liquidity and create conditions
that would make price manipulation relatively more likely.  The
Staff seems to justify a price disclosure requirement for secondary
market transactions based on a concern about price manipulation. 
In fact, a mandatory price disclosure requirement could lead to
reduced liquidity, creating a greater potential for market
manipulation.
In addition, some of the compliance instruments that will be
purchased and sold in the secondary market represent “offsets,” as
well as allowances from jurisdictions (e.g., Quebec) with which the
Cap and Trade program is “linked.”  There is a serious question
whether the ARB can legally demand disclosure of prices agreed upon
in transactions that occur outside California.
Finally, because the ARB does not regulate secondary market prices
for compliance instruments, no legitimate purpose would be served
by having the ARB demand price disclosure as a part of a transfer
request.  The ARB has a valid reason for requiring the disclosure
of information regarding transaction dates, quantities and products
transferred.  Price, however, is not within the ARB’s authority. 
Price disclosure should not be required.
9.	Section 95985(i):  Under the current Regulation addressing the
treatment of offset credits for U.S. forest projects, if a covered
entity retires a forestry ARB offset credit and thereafter the
project is invalidated, the Forest Owner is responsible and the
covered entity is still considered to be in compliance, even if it
does not have enough valid compliance instruments.  The Staff
proposes to amend the current Regulation.  The Staff asserts that a
change to the existing rule is needed to “clarify” that this
section only applies to ARB offset credits issued to U.S. forest
projects prior to the effective date of these amendments.  Staff
Report at pp. 277-78.  The Staff states that, after the effective
date of these amendments, the provisions in section 95985(h) will
apply to ARB offset credits issued to U.S. forest projects, meaning
that the risk of project invalidation will be shifted to the
purchaser of the offset.  Id.
As currently written, the subsection imposes the obligation to
replace the ARB offset credits on the “Forest Owner” if the offset
credit is determined to be invalid after retirement of the offset. 
Entities have relied upon this provision in the negotiation and
execution of contracts for the purchase of offsets, and in the
allocation of costs and risks under those contracts.  The Staff’s
proposed change would shift responsibility for “replacement” of
offset credits (credits issued prior to the effective date of these
amendments) from the Forest Owner to the purchaser of the offset
credit, thereby undermining the  terms of existing contracts.
The Staff has not adequately explained why this subsection should
be amended in this manner.  The current language provides a clear,
understandable assignment of responsibility in the event an offset
credit from a forestry project is deemed to be invalid.  Reversing
direction with respect to the assignment of liability will create
uncertainty and will be disruptive to entities with existing
contracts.  
If the ARB nevertheless decides to adopt the Staff’s recommendation
to amend this subsection, the ARB must afford “grandfathered”
treatment to contracts that pre-date the effective date of the
amended regulations.  The Staff’s proposal would only “grandfather”
offset credits issued to U.S. forest projects prior to January 1,
2014.  See Staff Report at pp. 277-78.  Grandfathered treatment
should apply to all pre-January 1, 2014 contracts, as well. 
Parties that relied upon the pre-existing rules at the time they
entered into an agreement for the purchase and sale of forest
project offsets should continue to be able to rely upon these
pre-existing rules for the duration of their contract.
10.	Sections 95891(f), 95894:  These sections address the
“Transition Assistance” (direct allocation of allowances) that the
Staff proposes for eligible “legacy contract” generators.  As a
general matter, the direct allocation of allowances should be
available to all otherwise eligible legacy contracts.  Staff’s
proposed Section 95894(a)(3)(C) would require an attestation that
the operator of the legacy contract generator made a good faith
effort, but was unable to renegotiate the legacy contract with the
counterparty.  The Staff states that the purpose of this new
section is to ensure that the “operator has discussed the
possibility of allocating these costs with the counterparty and has
exhausted all other options to cover the cost of compliance.” 
Staff Report at p. 168.
Shell Energy supports the Staff’s revised (October 16, 2013)
proposal to provide free allowances as Transition Assistance to
non-industrial legacy contract holders.  ARB should clarify,
however, that the Transition Assistance will continue to be
provided through the second compliance period (2017) even if the
parties are able to renegotiate the legacy contract.  This
assurance is necessary in order to support contract renegotiation
efforts.  Parties to an otherwise eligible legacy contract should
not be discouraged from renegotiating their contract based on the
potential loss of a direct allocation of allowances.  For this
reason, proposed Section 95894(a)(3)(C) should be clarified to
confirm that non-industrial legacy contract holders will receive
Transition Assistance whether or not the parties are able to
renegotiate the legacy contract.
Shell Energy appreciates the opportunity to provide these comments
on the Staff’s proposed amendments to the Cap and Trade
Regulations.  If Staff has any questions regarding these comments,
Shell Energy would be pleased to discuss the concerns raised in
these comments in greater detail.