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LA utility wary of California's emissions strategy
2008-07-31
SACRAMENTO, Calif. - The Los Angeles Department of Water and Power has a storied place in California history. Its water grabs drained an eastern Sierra lake to make modern-day Los Angeles possible, and its backroom maneuvering to secure more water was the subject of the Roman Polanski film "Chinatown." At the start of the decade, it became one of the unlikely profiteers during the state's energy crisis. Today, the nation's largest municipal utility is back in the spotlight, and this time the tables have turned: It may end up on the losing end of California's attempt to implement its landmark law to lower greenhouse gas emissions. At issue is a key strategy of creating a system in which high-polluting industries can buy credits from cleaner ones. The Department of Water and Power relies on cheap, out-of-state coal for some of its energy, which has helped keep its electricity rates among the lowest in the state. But it's one of the dirtiest ways to generate power, making coal-fired plants a major liability for the utility as California forges ahead with a strategy to cut carbon emissions dramatically under the greenhouse gas law Gov. Arnold Schwarzenegger signed in 2006. Officials with the utility, which serves 4 million residents, project it will have to pay $700 million annually in fees for burning coal under the cap-and-trade system being considered. That will divert money it currently spends on expanding energy efficiency and renewable energy programs, said David Nahai, the DWP's general manager. "It will certainly affect our customers," said Nahai, whose agency is lobbying the Schwarzenegger administration to reconsider its strategy. The debate has exposed a rift between the state's largest utilities and divided the politicians who helped craft the law, which has received international acclaim. State energy regulators propose that California power providers -- utilities, marketers, retailers and importers -- meet the new carbon limits or pay a price to pollute. Most of the cap would be met through compliance with tougher regulations on energy efficiency, renewable energy and other strategies, but the outstanding emissions would be cut through a carbon market. "The whole idea is we want to put a price on carbon so carbon-intensive power is more expensive to produce," said Frank Wolak, a Stanford University economics professor who specializes in energy. How a market system ultimately affects the state depends on the final rules and how much utilities will pay to participate, details that are still being worked out by regulators. Congress is weighing a similar system nationwide, drawing opposition from the coal industry, while utilities that rely on less-polluting energy sources see an opportunity to capitalize. Pacific Gas & Electric Co. has lined up behind a cap-and-trade system, which would reward utilities that use natural gas, hydropower, nuclear and renewable power. On the other side is the Department of Water and Power and other utilities that do not rely on as much clean energy. About half the DWP's energy comes from the coal-powered Navajo Power Plant in Arizona and the Intermountain Power Project in Utah. Other municipal utilities in California are concerned that a carbon-trading system would subject them to market manipulations similar to those experienced during the 2000-2001 energy crisis, which cost the state roughly $50 billion. "If we get this one wrong, consumers are really going to have to hold their breath because it's not going to be pretty," said Scott Tomashefsky, regulatory affairs manager at the Northern California Power Agency, which represents 15 public utilities serving about 700,000 customers. Southern California Democrats, some of the most outspoken advocates for reducing greenhouse gases, are supporting their coal-dependent utility. They say Los Angeles can wean itself off coal faster if the city-run utility doesn't have to pay a price to pollute. Instead, they say it should be allowed to spend its money on programs that curb emissions. "This untested financial scheme will put our residents at risk by jeopardizing our electric system reliability and risking rate shock, while there is no guarantee that our climate will be protected," Los Angeles Mayor Antonio Villaraigosa wrote on behalf of his city's utility in a March letter to Schwarzenegger. Former Assembly Speaker Fabian Nunez, one of the architects of the California law designed to reduce global warming, finds himself in the awkward position of having to criticize its implementation. "We expected more nuts and bolts on real emission reductions. Instead, the easy way out for everybody, as it has been in Europe, is a cap-and-trade system," Nunez said. "That's not really what this is about. The reason you have to mandate reductions is, if you don't, you don't force investors to bring technologies into place." The potential pay-to-pollute fees the Los Angeles utility faces mark an ironic turnabout. The long-term coal contracts that may prove a financial liability have provided price stability during rocky times, including the energy crisis. Cheap and plentiful coal allowed the Department of Water and Power to weather the rolling blackouts and price spikes afflicting the rest of California. The utility also profited by selling surplus power at inflated rates to the state. PG&E and the state's other large, investor-owned utilities, Southern California Edison and San Diego Gas & Electric, are poised to benefit from state-mandated efforts over the past decade to boost renewable energy. The global warming law requires California to reduce its overall greenhouse gas emissions to 1990 levels by 2020. Schwarzenegger, who lives within the boundaries of the Los Angeles utility, embraced it as his key environmental achievement. He supports using the market system to help meet the law's goals, rather than imposing tough restrictions on industry emissions, a move Democrats say would get faster results. Schwarzenegger spokeswoman Lisa Page said the Republican governor believes a cap-and-trade program will create incentives for utilities to transition toward renewable and lower-carbon electricity. "In the long run, his and other customers' bills are going to go down," she said.
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