By Joshua T. Bledsoe, Tim B. Henderson, and Jared W. Johnson

With the first auction in California’s cap and trade program fast-approaching on November 14, 2012, the California Air Resources Board (“ARB”) recently suspended a much-discussed aspect of the program that requires first deliverers of electricity to attest that they have not engaged in “resource shuffling.”  Resource shuffling involves a seller of energy into California modifying its portfolio of sales so that lower or no-emission electricity is delivered to California, while electricity associated with higher greenhouse gas (“GHG”) emissions is delivered to states without GHG limits.  ARB Chairman Mary D. Nichols suspended the attestation requirement for 18 months in an August 16, 2012 letter after Commissioner Philip D. Moeller of the Federal Energy Regulatory Commission (“FERC”) said that the provisions on resource shuffling were “creating uncertainty and great concern among entities that sell [electricity] into California.”

As Chairman Nichols wrote, the prohibition on resource shuffling is an attempt to ensure that reductions in GHG emissions in California do not result in higher GHG emissions elsewhere, also known as leakage.  However, the cap and trade regulations broadly define resource shuffling.  According to 17 California Code of Regulations section 95802(a)(250), resource shuffling is “any plan, scheme, or artifice to receive credit based on emissions reductions that have not occurred, involving the delivery of electricity to the California grid.”  First deliverers of electricity annually would have been required to certify, under penalty of perjury, that they had not engaged in resource shuffling.  17 Cal. Code Regs. § 95852(b)(2). 

Despite the acknowledged need to avoid leakage, the combination of the broad and vague definition plus potentially severe penalties for perjury raised concerns that regulatory uncertainty could destabilize California’s energy market.  In particular, FERC Commissioner Moeller stated that California “continues to depend on importing nearly 25 percent of its consumed electricity and could not maintain reliable and affordable electricity if out-of-state resources chose to avoid regulatory uncertainty by electing not to participate in the California market.”  Entities, both directly regulated by the cap and trade program and otherwise affected by the program’s impact on energy markets, also expressed confusion about the resource shuffling prohibition in comments on a May 4, 2012 ARB workshop.  The comments described multiple scenarios that could be deemed resource shuffling notwithstanding the fact that decisions related to the marketing and delivering of electric energy depend on many factors unrelated to GHG emissions (e.g., timing, contractual obligations, transmission availability, and related electricity deliverability issues).  Energy market participants were concerned that without prospective clarity regarding the definition of resource shuffling, routine energy transactions retroactively could be categorized as a violation of the cap and trade program.

It remains to be seen what action ARB will take to address concerns about the prohibition on resource shuffling.  While Chairman Nichols has stated that ARB will review the trades that take place in the first 18 months of active allowance trading, it is unclear what additional guidance will be the outcome of the agency’s monitoring.  Commissioner Moeller stated that guidance alone would be insufficient, a view that Chairman Nichols echoed in her letter, stating “[a]dditional rulemaking, as opposed to case-by-case guidance, is appropriate in order to define the types of conduct or transactions that would trigger a finding of resource shuffling.”  Some observers have expressed concerns that Chairman Nichols’ letter preserved the possibility that the status quo will reign after the 18-month suspension expires and ARB will have offered no meaningful guidance for concerned market participants.  With the first auction just months away, ARB’s suspension of the attestation requirement represents a first step towards fixing the resource shuffling regulations, but concerns remain about how the prohibition will be implemented over the life of the cap and trade program.