Comment Log Display

November 25, 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 California
Air Resources Board’s October 2008 AB 32 Proposed Scoping Plan

Dear Chairman Nichols and Messrs. Goldstene and Shulock:
Pacific Gas and Electric Company (“PG&E”) welcomes the opportunity
to provide these comments on the California Air Resources Board’s
(“ARB”) October 2008 Proposed AB 32 Scoping Plan (“Plan”).  We also
incorporate here by reference our comments on the June 2008 Draft
Scoping Plan filed with the ARB on August 5, 2008 and the comments
we have filed on recommendations by the California Public Utilities
Commission (“CPUC”) and the California Energy Commission (“CEC”) on
AB 32 policies affecting electricity and natural gas services
provided to California consumers, businesses, and public
institutions (copies enclosed).

I.	INTRODUCTION.

PG&E is committed to working with the ARB, other State agencies
and concerned stakeholders to make AB 32 a success and a model for
emerging regional and national greenhouse gas (“GHG”) reduction
programs.  We commend ARB Staff for their efforts in producing the
Plan which provides a comprehensive, conceptual roadmap for the
regulatory implementation process to follow between now and 2012. 
As the Plan recognizes, there remains much work to be done in the
months and years ahead to ensure that the reduction measures
ultimately adopted by ARB achieve the State’s GHG reduction targets
in a “technologically feasible,” “cost-effective” and “equitable”
manner as required by AB 32. /

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. 
Indeed, over 50% of the electricity PG&E currently delivers to its
customers comes from sources that emit no greenhouse gases at all.

PG&E approaches AB 32 implementation guided by four 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
technologically feasible and cost-effective reduction strategies
using well-designed market-based mechanisms 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.

With these objectives in mind, the following summary highlights
our over-arching comments on the Plan.  Our more detailed comments
are set forth in section III following this summary.

 
II.	SUMMARY.

A.	The Proposed 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.	Are identified emissions reductions 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?

The ARB will need to evaluate and pursue reduction measures across
all sectors of the economy to achieve AB 32’s GHG reduction
targets.  The Plan takes an important first step toward this
comprehensive approach by identifying a wide range of measures,
including market mechanisms and programs, and by recognizing that
all reduction measures must be carefully analyzed and compared for
technological feasibility and cost effectiveness during the AB 32
regulatory implementation process (Plan, pp. ES-6 and 7, 84, 85 and
106).

The Plan also recognizes that current cost estimates reflect a
range of potential costs associated with programmatic measures and
that the criteria for assessing cost-effectiveness may evolve
during regulatory implementation.  We support the ARB’s commitment
to conduct additional and updated cost-effectiveness analyses of
the proposed measures during the rulemaking phase in a rigorous and
transparent process with full public participation and opportunity
for review and comment (Plan, pp. 84, 85).  We are concerned,
however that the analysis performed to date has not provided a
systematic comparison of all proposed measures across all sectors. 
To this end, we urge the ARB to take a comprehensive State-wide
approach to assessing cost-effectiveness to ensure that all
measures are analyzed and compared across all sectors of our
economy during the rulemaking process.

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

PG&E commends the ARB for recognizing that a well-designed,
multi-sector regional or national cap-and-trade program linked to
the Western Climate Initiative (“WCI”) and other emerging regional
and national programs can provide real, sustained and
cost-effective GHG reductions (Plan, p. 30).  We strongly support
the Proposed Plan’s recommendation to convene a rulemaking to
design and implement the cap-and-trade program and to seek input
from the public and stakeholders and those with expertise relevant
to the design of cap-and-trade programs (Id., p. C 23).  We look
forward to participating in this process.

To manage market volatility and minimize cost impacts to our
customers, especially in these times of economic uncertainty, we
believe it is essential that cap-and-trade market design include
viable consumer cost protections, such as a price collar or a
strategic allowance reserve, which could provide additional
allowance supply in the event allowance prices exceed a
pre-determined level.  For example, a price collar would include
market intervention to make additional GHG emission allowances
available to mitigate substantial upward movement of allowance
prices while maintaining a multi-year carbon budget.  A lower bound
on allowance prices could also specify minimum acceptable bids in
allowance auctions or by other means.  We therefore request that
ARB amend the Proposed Plan expressly to provide for consideration
of potential consumer cost protection mechanisms during the
cap-and-trade rulemaking.

It is also important that California's cap-and-trade program be
designed from the outset to integrate seamlessly with other market
based programs to ensure adequate market depth and liquidity.  In
this regard, we support the ARB’s recommendation that the
cap-and-trade rulemaking be closely coordinated with the WCI’s
timeline for developing a regional cap-and-trade program (Plan, p.
30).  In this regard, it is very important that the rulemaking
provide a clear process for integrating the design and
implementation of the cap-and-trade program with the formal
rulemaking process for the WCI cap-and-trade program and other
regional and national programs.  ARB should consider combining its
cap-and-trade rulemaking with identical rulemaking proceedings
among the other states participating in the WCI, so that the
design, systems development and testing of a cap-and-trade program
can proceed on an efficient, expedited basis with broad public
participation by all the WCI states.

Broad access to environmentally sound and verifiable offsets will
be necessary to achieve AB 32’s reduction targets in a
cost-effective manner and we believe there should be no geographic
or quantitative limits on their use.  While the Plan endorses broad
geographic access to offset projects, we believe that the proposed
quantitative limit of 49% of annual emission reductions would be
unduly restrictive.  We also strongly encourage ARB to adopt or
approve offset protocols early in the regulatory implementation
process to ensure an adequate supply of eligible projects by 2012. 
These critical components of the overall market design will no
doubt benefit from closer analysis during the cap-and-trade
rulemaking next year.

C.	Properly Designed and Equitably Administered Programmatic
Measures Can Make a Meaningful Contribution to GHG Reductions.

We agree that programmatic measures have the potential to provide
significant GHG reductions in the years ahead if determined to be
technologically feasible and cost-effective across all sectors.  In
this regard, PG&E is committed to increased investment in energy
efficiency programs and increased use of renewable resources.

However, as discussed more fully in Section III and in addition to
the matters raised in our August 5, 2008 comments and comments at
the CPUC and CEC, we have the following concerns regarding certain
energy-related programmatic measures: (1) since the Plan
acknowledges that ARB is not the agency with expertise in these
programs, we urge ARB to look to current and evolving initiatives
in the renewables, energy efficiency, and combined heat and power
(“CHP”) areas at the agencies with expertise in these areas, and to
monitor and acknowledge the efforts of these agencies to ensure any
GHG “reduction measures” are feasible and cost-effective, both
within the energy sector and across all sectors; (2) as a matter of
equity, all load serving entities should be subject to the same
targets and same cost-effectiveness criteria - the Plan provides
for load serving entity (“LSE”) equity on energy efficiency, but
does not do so explicitly for renewables and CHP.

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

PG&E strongly supports the ARB’s recommendation to establish a
cap-and-trade program that will link with the other Western Climate
Initiative (“WCI”) jurisdictions, and we look forward to
participating in the cap-and-trade rulemaking.  PG&E also agrees
with ARB’s stated intention to seek input from stakeholders and
consult with experts on market design, including allowance
allocation and use of auction revenue.  In addition, we consider
the following topics to be of critical importance for consideration
in the rulemaking and by the experts, in addition to those topics
listed in Appendix C to the Plan at pages C22-C23:

•	Allowance allocation and use of auction revenue, including
detailed modeling on consumer economic impacts.
•	Consumer cost protection mechanisms.
•	Offset policy.
•	Integration with the WCI and other developing regional and
national programs on cap-and-trade design.
•	Appropriate treatment of small commercial and residential
natural gas use.
In addition to a process for addressing the` policy issues above,
it would be helpful for the public and all stakeholders if ARB
created a clearer timeline and integrated regional rulemaking
process, working back from 2012, with milestones for adopting
specific components of the cap-and-trade program, including
development, scaling up and testing of regional market systems. 
Experience with the implementation of other markets, including
Regional Greenhouse Gas Initiative (“RGGI”) and California’s own
Independent System Operator in the electric sector, highlights the
need to build in time to allow for adequate systems development and
stress testing, as well as schedule slippage.  PG&E also recommends
that the ARB invite experts from RGGI and the European Union (“EU”)
to inform California about their experiences.

1.	Consumer Cost Protection Mechanisms.

One of the ARB’s core policy design principles is to “minimize the
economic burden of the program on consumers.”  (Plan, p. C 20.) 
Among the most important lessons California learned from the 2000
2001 energy crisis is that timely “backstop” mechanisms are
essential to protect customers in the event that unregulated or
partially regulated markets experience a catastrophic failure.  The
need for quick or automatic “backstop” mechanisms applies to other
markets as well, including a cap-and-trade greenhouse gas emissions
market. /

A well-designed greenhouse gas emissions trading market can
attract investment in new GHG reducing technologies and enable
markets to determine the most economic and cost-effective means of
reducing GHGs across multiple sectors of the economy.  However,
like any market, and especially commodities and futures markets,
even the best designed greenhouse gas emissions trading market can
experience failure or significant disruption through hoarding,
manipulation, severe weather or other unforeseen circumstances,
particularly during its start-up or transitional stages.  During
the October 23, 2008 ARB Board meeting, Board members asked staff
to examine carefully near-term economic impacts of the Scoping
Plan, especially in light of current economic turmoil and
uncertainty.  Consumer cost protection measures will be critical to
managing economic impacts of AB 32 implementation, especially
during the beginning stages of the cap-and-trade market or if the
market is limited regionally. /  Price spikes and crashes could
impose unnecessary costs on Californians and threaten the long term
viability of the GHG reduction program.  The scope of ARB’s
cap-and-trade rulemaking should expressly include an examination of
potential consumer cost containment mechanisms, especially those
that also maintain long-term environmental integrity.

PG&E believes that consumer cost protection mechanisms can be
implemented without impeding investment in low- and zero-carbon
technologies or impairing our ability to meet emission reduction
goals.  As we described in our August 5, 2008 Comments on the Draft
Scoping Plan, one possible policy tool to help manage overall
volatility and unexpected economic costs, while at the same time
provide a clear path for technology investment and ensure that
there is a “price for carbon” is the allowance “price collar.”  The
elements of a “price collar” would include market intervention to
make additional GHG emission allowances available to mitigate
substantial upward movement of allowance prices while maintaining a
multi-year carbon budget.  A lower bound on allowance prices could
also specify minimum acceptable bids in allowance auctions or by
other means. /  The Lieberman-Warner and Dingell-Boucher draft
national GHG legislation provides another example of a cost
protection mechanism that preserves environmental integrity and
would enable linkage to other GHG markets: an allowance reserve. 
Other proposals worthy of examination include those of the U.S.
Climate Action Partnership and the Nicholas Institute for
Environmental Policy Solutions. /  For these reasons, we believe
examination and adoption of such mechanisms should be explicitly
included in the scope of the cap-and-trade rulemaking.

2.	Offsets.

PG&E agrees with the Plan’s recommendation to endorse the use of
offsets without geographic restrictions.  However, PG&E is
concerned by the numerical limitation on offset quantity, “limited
to no more than 49 percent of the required reduction of emissions.”
In particular, this policy drastically limits the amount of offsets
allowed in the first years of the program, which may
unintentionally greatly increase adverse economic impacts of the
cap-and-trade market.  For example, if the 2013 cap is set at 1%
below the 2012 emissions level, then this policy implies that the
offset quantity would be severely limited to 0.49% of the cap level
in 2013.  New GHG reducing technology will take time to develop and
is generally not likely to be available in the early years of the
cap.  The Scoping Plan offset policy raises serious concerns about
California’s ability to meet the cap in the most cost-effective
manner in the early years of the program.

Additionally, the policy described does not enable a specific
entity to know the quantity of offsets that it will be able to use
for compliance.  The policy bases the quantity limit on the
reductions of the entire cap and provides no guidance for
individual entities.  Forty-nine percent of the required reductions
may be as little as less than 1% of an entity’s compliance
obligation in early years and possibly 10% of an entity’s
compliance obligation in later years.  During the rulemaking
process, the ARB needs to clarify application of offset policy so
that individual entities have adequate understanding and notice of
the offsets they may use.

Finally, the Scoping Plan should contain a process to have the
Board or Executive Officer start approving protocols in a timely
fashion to ensure an adequate supply of offset projects by 2012. 
The Scoping Plan states that offsets must be “quantified according
to Board-adopted methodologies, and ARB must adopt a regulation to
verify and enforce the reductions” (Plan, p. 36).  The development
of offset projects will take years, and project proponents will
need surety in the protocols they are allowed to use.  The Board
should adopt a schedule to review and adopt existing protocols in
order to not stifle the offset market and prevent access to these
cost-effective GHG reduction options.

3.	Natural Gas Sector.

PG&E agrees with the ARB decision not to include small commercial
and residential natural gas use in the first term of the
cap-and-trade program.  As we have stated in past comments, this
sector of natural gas users may be better served by taking into
account reductions already forecast under energy efficiency
programs.  Evaluation of whether and how small natural gas end
users should be regulated should be included in the scope of the
cap-and-trade proceeding and in the continuing consideration of the
cost-effectiveness and feasibility of energy efficiency measures as
part of AB 32.

B.	Programmatic Measures.

1.	Renewable Energy Resources.

PG&E supports the increased use of renewable energy and agrees
that the expanded development and procurement of renewable
resources can play a significant role in meeting AB 32’s GHG
reduction goals.  Indeed, in Executive Order S-14-08, issued
November 17, 2008, Governor Schwarzenegger has called for all
sellers of electricity to “serve 33 percent of their load with
renewable energy by 2020.”  The Executive Order properly notes that
achieving this goal will require “greater coordination and
streamlining of the siting, permitting, and procurement processes
for renewable generation,” including addressing “various challenges
that impeded...timely realization [of renewables goals], relating
to transmission, financing, siting, permitting, integration,
environmental and military objectives, technology development and
commercialization and equipment.”  Governor Schwarzenegger also
found that “there are substantial barriers to generation siting,
permitting and transmission that must be addressed in order to
achieve the 2010 and 2020 RPS goals.” /  The ARB, in the Proposed
Plan, also describes some of the challenges to achieving a 33
percent renewable energy procurement goal, especially those related
to transmission and system integration.  Nevertheless, the Scoping
Plan counts on the emissions avoided from this target and assumes
these challenges will be addressed in time to achieve the 33
percent goal.  For example, the Scoping Plan does not currently
acknowledge the multi-year, multi-agency permitting challenges that
are slowing renewables development.  A February 2008 State
Auditor’s Report indicated that it can take 36 months for a
generator to receive all the necessary permits to begin site
construction. /  The Plan should now reflect the same findings on
these challenges as noted in the Governor’s Executive Order, and
acknowledge the uncertainty of relying on emissions reductions from
a 33 percent renewables mandate until the barriers to
implementation and cost-effectiveness issues are addressed and
removed.  It is essential that the Proposed Plan provide compliance
off-ramps and flexibility for issues such as transmission
availability, system integration, siting and other permits, as well
as availability of financing, all of which may be beyond the
control of PG&E and other load-serving entities.

In the Draft Scoping Plan, PG&E noted that the 33% renewables goal
referenced actions by both investor-owned and publicly-owned
utilities.  This language was removed in the Proposed Scoping Plan
33% renewables goal.  It is critical that state GHG measures be
applied equally, with consistent mandates and accountability rules,
to all entities in the state. /  This is the approach that was
taken by the Legislature, CPUC, and CEC in implementing the
emissions performance standard under SB 1368, and it should be the
same approach taken by ARB on any programmatic measures that are
included under AB 32.  It is also now directly acknowledged by the
Governor’s call for “all retail providers of electricity” to be
covered under his Executive Order.

To further encourage the development of new renewable generation
and to foster achievement of the State’s renewables goals, PG&E has
proposed an innovative pilot program in its 2008 RPS Solicitation
that would streamline the contracting process for renewable
generators greater than 1.5 MW by offering a form PPA available
year-round, with no requirement for renewable generators to
participate in the competitive solicitation, thus eliminating the
bidding and negotiation process for any renewable generator that
accepts the form PPA’s terms and conditions.  The pilot program
would reduce negotiation time, time and effort required for CPUC
approval, and still ensure adequate, reliable energy supplies
through the use of suitable terms and conditions in a simplified
contracting process.

Larger generators should continue to participate in PG&E’s
competitive solicitations and provide credit assurances and
performance guarantees to assure that these resources begin to
deliver renewable energy to the grid at the time and in the amount
required by their contract.  Recognizing that certain generators
may desire a more streamlined process, however, PG&E has proposed
an innovative pilot program in its 2009 RPS Solicitation that could
reduce the time and cost for renewable generators – of any size –
to secure a contract, while still protecting PG&E and its customers
from potential non-performance under such a contract.  However,
PG&E’s pilot program is not mentioned as an alternative that could
increase the number of renewable projects under contract.

		2.	Combined Heat and Power.

The ARB recommends the addition of 4,000 MW of efficient CHP to
reduce GHG emissions.  Under the ARB assumptions, 3200 MW of this
CHP would be under 5 MW and all of it would operate at 85% capacity
factor.  PG&E appreciates the explicit addition of the criteria of
efficiency to the Scoping Plan, for some CHP may actually increase
GHG emissions. /  We understand that the ARB intends only for
efficient CHP sized to minimum, consistent thermal load to be
included as a GHG measure.  PG&E recommends the ARB communicate its
assumption on efficient CHP to the agencies developing the CHP
measure such that only CHP that truly represents GHG reductions is
supported.

Recommendations on CHP policy extraneous to reducing GHG emissions
are beyond the mandate of AB 32 and should not be included in ARB
recommendations.  The CPUC is already planning to address CHP
policy in a new CHP proceeding and in the AB 1613 proceeding, and
the CEC should open a similar proceeding to apply equal policies
and AB 1613 to publicly-owned utilities (“POUs”).  Therefore, the
Proposed Scoping Plan Appendix C’s inclusion of CEC Integrated
Energy Policy Report (“IEPR”) CHP recommendations is either
inappropriate for AB 32 Scope or is already being addressed by the
CPUC for investor-owned utilities (“IOUs”).  PG&E recommends that
Appendix C be updated to acknowledge that some IEPR recommendations
are contrary to legislation or to well-established CPUC findings /
and other IEPR recommendations are already being considered or
implemented by the CPUC.  As such, the status of CHP policy should
be changed in Table 32 to correctly characterize the status of
policy development.

 For example, the CPUC has established a proceeding to implement
AB 1613 that will establish a feed-in tariff for efficient CHP up
to 20 MW.  However, the Plan states that AB 1613 “stops short of
providing small CHP operators with the guaranteed access to
wholesale markets recommended in the CEC’s” IEPR.  AB 1613 provides
this guaranteed access to wholesale markets for CHP up to 20 MW if
the customer wishing access is a bundled IOU customer, PG&E
interprets the Plan to be referring to AB 1613’s lack of a
statewide guarantee for small CHP wholesale market access in non
IOU service territories.  PG&E agrees that to be truly a
comprehensive effort, AB 1613 should be extended state-wide to POU
service territories and to community choice aggregators, if they
are established.

Rather than relying on IEPR, the Scoping Plan should point out
that assumptions about likely market penetration, likely
efficiencies, likely operating characteristics, and suggested
methods for overcoming market barriers are all preliminary.  PG&E’s
conversations with customers who could install CHP indicate that
primary concerns are gas price volatility, maintenance
requirements, reliability of cogeneration technology, and the lack
of requisite expertise for CHP operations.  As the CPUC has
recognized, further study and analysis remains before the likely
contribution from CHP to GHG emission reductions can be
ascertained.  PG&E looks forward to working with all concerned
stakeholders to study the market, technologies, potential,
emissions reductions, costs and benefits of CHP in the energy
agency proceedings.

3.	Customer Energy Efficiency.

PG&E commends ARB for proactively and aggressively committing to
remove barriers to more effective deployment of energy efficiency
(“EE”) resources in the state.  Given the very ambitious targets
specified in the Plan, success in these programs can only be
accomplished by transforming markets in EE products.  PG&E supports
changes that have been made to the Plan.  In particular, the Plan
recognizes the importance of comparable energy efficiency targets
in all regions of California, for all retail providers.

The Plan also provides additional needed clarity on the origin of
the energy efficiency goals, acknowledging that the goals are
contingent on innovation, unprecedented market transformation, and
unprecedented success of programs.  However, the Plan still
contains an error that could have important implications for the
goal’s feasibility.  The Plan states that in the CPUC and CEC
Aggressive Case in the E3 model, “it is assumed that the 32,000 GWH
of savings are net of about 15,000 GWh of energy efficiency
believed to be “embedded” in the CEC’s baseline demand forecast.” 
Examination of the E3 model, as supported by the recent CPUC/CEC
Final Decision, / shows that the Aggressive Case results in
approximately 20,000 additional GWh of energy efficiency over the
16,450 GWh assumed to be embedded in the load forecast.  The
discrepancies between the agencies’ understanding on this important
assumptions highlights the need for continued coordination between
the agencies as this issue is further explored.

In particular, ARB can help by acknowledging and supporting the
role of the agencies and stakeholders with expertise in EE
programs, including the development by those agencies and
stakeholders of sector-specific and customer-specific programs and
goals.  In particular, ARB should acknowledge that the CPUC, CEC,
local governments, and public utilities will all be collaborating
in the development of specific EE programs and goals for the 2012
2020 period, and the cost-effectiveness and feasibility of those
goals on a customer-specific and utility-specific basis are still
in development.  Thus, the ARB’s AB 32 goals will need to be
adjusted and revised to take into account these revised goals and
programs.

Key challenges in pursuing EE programs include:

•	Standardized measurement, evaluation, and oversight of the EE
measures across agencies (CPUC, CEC) and entities (POU, IOU).
•	Energy Commission efforts to improve and increase compliance
with codes and standards.
•	A regular and more structured cycle for codes and standards
review and updates which continually tighten the standards and
continue to deliver more GHG reductions.  This should apply both to
building codes and for appliance standards.  In addition new
standards should be developed for a broader ranger of appliances
such as electronics and other energy using devices.
•	Addressing the continued challenges of lower federal energy
efficiency standards relative to California (through state efforts
at the national level).
•	The securing of timely funding to provide IOUs an opportunity to
meet the additional and ambitious EE targets.
•	Complementary legislation such as AB 811, which allows any city
to provide loans for EE and solar that can be repaid through tax
assessments.
To attain the goals of AB 32 a roadmap needs to be developed that
matches the POU and IOU EE strategic plans goals with the very
ambitious ARB proposed EE targets.  ARB can then monitor progress
of those programs and the role they can play in achieving AB 32’s
overall emissions targets.

4.	Control of Natural Gas Emissions.

The Proposed Scoping Plan includes a measure to improve operating
practices and replace older equipment of natural gas pipelines. 
The Plan states that this will save 0.9 MMT (or 2,230,000 MMBtu) at
an annualized cost of $0.5 Million and annualized savings of $17.7
Million, estimated by applying the natural gas savings from the U.
S. Environmental Protection Agency’s (“EPA’s”) Natural Gas STAR
program actions to a number of units in the current emissions
inventory.  PG&E was a charter member of EPA’s Natural Gas Star
program, having joined the program in 1994.  Through our
participation, we have been tracking the emissions reductions
achieved through this program.  Since 1994, PG&E has reduced over
one million tons of CO2e.  In our most recent estimates, total
vented emissions from all sources were less than 1,000,000 MMBtu. 
Assuming that the other natural gas pipeline companies in
California have similar emissions, fugitive emissions would have to
be entirely eliminated to reach the ARB goal of eliminating
2,230,000 MMBtu of natural gas emissions.  Completely eliminating
fugitive emissions will be extremely difficult and is likely to
cost far more than ARB estimates.  PG&E agrees that a detailed
industry survey is needed to determine the magnitude of potential
costs and savings, and the Scoping Plan should reflect that the
goals for fugitive emissions are still under development.  We look
forward to continuing to work with the ARB on efforts to reduce
these GHG emissions.

C.	Economic Modeling.

1.	The ARB Should Conduct Cross Sector Cost-Effectiveness and
Technological Feasibility Analysis For All Measures Across All
Sectors.

The Scoping Plan correctly states that modeling results are highly
dependent on input assumptions, and that these input assumptions
vary in detail and quality (G 3, G 4).  The cost estimates are
likely to change during the regulatory process as the measures are
further developed and analyzed.

As cost-effectiveness information will be developed for the
measures, or will be refined for the few cases where such
information exists, the ARB needs to have a process to continue
systematic, cross-measure cost-effectiveness analysis through the
regulatory process and into the implementation phase.  This
analytical process is necessary to understand how new information
on the inputs changes the cost-effectiveness of a measure in
comparison to the other measures.  By undertaking this analysis,
the ARB can ensure its responsibility that it pursues only those
measures which are technologically feasible and cost-effective.

2.	Additional Insights from the Economic Modeling

PG&E has identified serious drawbacks to the economic modeling
that limit the utility of the results presented in the Scoping
Plan.  Continued economic modeling in the upcoming regulatory
process will both improve the quality of the inputs and allow
insight from comparing the results of various policy scenarios.

Economic modeling results are best used to compare various policy
options.  For example, the ARB could evaluate the use of additional
amounts of $10 or $20 per ton offsets rather than implementing 33%
RPS at $133 per ton.  The model impacts of this scenario on the
economy versus the Scoping Plan case would provide meaningful
insights.

The preliminary nature of the inputs combined with the dependence
of modeling outputs on the measure cost-effectiveness suggests that
model outcomes are not currently reliable.  The ARB should continue
to run the models with the improved input assumptions throughout
the regulatory process, and beyond, to understand the economic
ramifications of the Scoping Plan.

Certain aspects of modeling results cast additional doubt on the
validity of the results.  For example, all “command and control”
options in BEAR and E-DRAM are shown to be more beneficial to the
economy than the option that allows some cap and trade.  This
result appears contrary to the approach taken by ARB when it
included additional energy efficiency and conservation in the
cap-and-trade scenario.  The counterintuitive result of the cap and
trade option being more expensive requires explanation. 
Additionally, the modeling result of a carbon price of $10 per ton
is not reflective of the full cost of the AB 32 program.  For
example, the price of the 33% renewables measure is not included in
this figure.  Finally, the ARB has provided no evidence for why
offsets were modeled at $20 per ton.  For example, PG&E has
procured offsets for less than half this amount for its
ClimateSmart program.

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:bd
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