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

Seeking to quell uncertainty surrounding the definition of resource shuffling ahead of the first cap-and-trade auction on November 14, 2012, the California Air Resources Board (“CARB”) passed a Resolution on October 18, 2012, requiring the Executive Officer to redefine resource shuffling and provide concrete examples.  CARB’s Resolution requires CARB Staff to issue proposed regulatory amendments by mid-2013 and release regulatory guidance consistent with the Resolution before the inaugural November 14, 2012 allowance auction.  The Executive Officer will work with the California Independent System Operator (“CAISO”), the California Public Utilities Commission, the California Energy Commission, and stakeholders on the new definition.  “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.  Our previous blog entry described the confusion surrounding the resource shuffling prohibition that spurred CARB’s decision to suspend the attestation requirement

CARB’s new Resolution incorporates specific provisions from a Staff proposal that likely will be included in the regulatory amendments, subject to any refinements or modifications to the proposals made during the planned stakeholder discussions.  Namely, CARB Staff set forth the following 13 actions that are proposed to be deemed “safe harbors” from the resource shuffling prohibition:

  • Changes in electricity delivery to comply with the Renewable Portfolio Standard (“RPS”).
  • Compliance with laws and regulations, including the Emissions Performance Standard, which CARB Staff identified as a major risk for resource shuffling in its October 18, 2012 presentation.
  • Compliance with rules for the maintenance of grid reliability.
  • Delivery changes required by court order or binding settlement.
  • Resource retirement.
  • Contract termination or resource divestment not directed at reducing GHG compliance obligations.
  • Early contract termination or resource divestment for resources subject to the Emissions Performance Standard.
  • Contract expiration.
  • Short-term trading under contracts for specified or unspecified power with terms of 12 months or less, based on “economic decisions,” including congestion costs but not implicit and explicit GHG costs.
  • Short-term trading under contracts for specified or unspecified power with terms of 12 months or less resulting from an economic bid that clears CAISO’s day-ahead or real-time market, based on “economic decisions,” which includes congestion costs and implicit and explicit GHG costs.  However, such actions are not protected if related to selling off power or assigning a contract for electricity from a power plant covered under the Emission Performance Standard that is not covered in the final three safe harbors.
  • Operational emergencies, transmission or distribution constraints, including if caused by the inability to secure or maintain transmission rights, transmission curtailments or outages.
  • Delivery changes where a first deliverer has surplus electricity because it was required to take electricity from specific generating units.
  • Electricity provided to make up for transmission losses related to deliveries from out-of-state power plants.

CARB Staff also proposed redefining what actions will be deemed resource shuffling, highlighting two situations.  First, resource shuffling would include the substitution of lower emission electricity to replace electricity from a higher emission power plant that is covered by, but does not meet, the Emission Performance Standard to reduce a compliance obligation. Second, resource shuffling would include assignment of a long-term contract for high emission electricity to a third party under the situation described above for the purpose of reducing a compliance obligation.  CARB Staff stated that they will work with stakeholders with long-term contracts or that own affected facilities to deal with moving to divestment and avoiding resource shuffling. 

CARB’s action came in the wake of a September 24, 2012 meeting of the Emissions Market Assessment Committee (“EMAC”), a collection of advisors to CARB on the cap-and-trade program.  The EMAC recommended further regulatory clarification to avoid increased compliance costs and disruption to electricity markets.  The EMAC also recommended that any adjustments to the cap-and-trade program to prevent leakage be set forth in advance of the November 14, 2012 emission allowances auction to lower exposure to litigation risk.

Investor-owned utilities (“IOUs”) presented their own solution to the resource shuffling suspension at the EMAC meeting.  The IOUs recommended:  (1) changing the emphasis to “substitutions of resources” as opposed to “emissions reductions”; and (2) expressly defining what resource shuffling is not.  The IOUs floated a definition focusing on “impermissible substitution of higher emissions resources with relatively lower emissions resources” and listed suggested safe harbors, which largely were included in CARB Staff’s October 18, 2012 proposal.  The IOUs warned that electricity and emissions markets could be seriously impacted by regulatory ambiguity.

Despite the promise of corrective action, some have continued to express concerns about implementation of the cap-and-trade program.  Indeed, concerns have been raised about possible price increases for GHG allowances and an incentive to enter short-term contracts to fall within resource shuffling safe harbors.  As the first auction rapidly approaches, CARB’s recent activity and promised guidance provides some incremental guidance, but may prove cold comfort to market participants still searching for definitive rules.