Regulator urges change in California cap-and-trade program

WASHINGTON Aug 8 (Reuters Point Carbon) - A federal regulator asked California's governor to suspend a section of the state's cap-and-trade regulations that addresses power imported from out of state, warning that it threatens to destabilize its power supply and disrupt the world's eighth largest economy.

Phillip Moeller, one of five commissioners of the Federal Energy Regulatory Commission (FERC), which oversees electric reliability, said in a letter to Governor Jerry Brown that California's prohibition of and lack of clarity about "resource shuffling" may disrupt its electricity market.

"I respectfully request that you direct ARB to suspend enforcement of the prohibition of resource shuffling until such time that the ARB clarifies rules surrounding compliance with, and enforcement of, the provision," Moeller wrote in the letter dated August 6.

Resource shuffling occurs when a regulated plant that delivers electricity to California modifies its contracts to import lower-emission electricity to the state while sending its more carbon-intensive electricity to other states without greenhouse gas curbs, giving the impression that it has reduced its emissions.

By redirecting their dirty power to other states, they could receive additional emission allowances under the state's cap-and-trade program, potentially creating a windfall for firms that have still emitted carbon outside of the state and undermining the state's goals to cut carbon emissions.

California requires power importers to pledge in writing every year that they are not shuffling their resources.

Moeller and some power producers have criticized the ARB rules, saying that the regulator's definition of resource shuffling is too broad.

They are also concerned that because power trading across state lines is complicated and fast-paced, out-of-state power producers may sometimes run afoul of the rule without knowing it.

"By failing to clearly define "resource shuffling" but nevertheless prohibiting it, and by requiring energy importers to affirm, under penalty of perjury, that they have not engaged in resource shuffling, the ARB is creating uncertainty and great concern among entities that sell into California," Moeller wrote.

He added that California relies on imported power for nearly one-quarter of its electricity supply and would not be able to maintain electric reliability if those power producers opted not to participate in the California market to avoid the regulatory uncertainty.

Of the 25 percent of electricity that California gets from outside its borders, a significant amount comes from more carbon-intensive sources and accounts for about 50 percent of the state's total electricity sector emissions.

The ARB said it will continue to pay "very careful attention" to the issue in the design and enforcement of its cap-and-trade program.

"The state will continue to work closely with FERC and other agencies to guard against any adverse impacts to the economies of California and other western states," said Stanley Young, a spokesman for the ARB.

The regulator has said previously that it will not change the provision of its cap-and-trade regulation because it believes it will prevent fraud.

Moeller added that despite its good intentions, California regulators run the risk of repeating the kind of chaos that occurred during the state's energy crisis in 2000-2001, when electricity prices soared and there were frequent intermittent power shortages.

"Regardless of any laudable intentions the ARB has in developing its approach to these issues, the potential ramifications to the economies of California and the Western states require extreme caution to prevent market and supply disruptions."

Jon Costantino, a senior advisor on climate change and environmental policy at law firm Mannat, Phelps & Phillips, said it is unlikely that the warnings of one commissioner will sway California regulators.

"It is only one commissioner, so until we hear that a majority feel the same way, it is just one voice," he said, adding that there has been no indication from the Brown administration that it will change direction.

(Reporting by Valerie Volcovici)