BEFORE THE PUBLIC UTILITIES COMMISSION OF THE STATE OF CALIFORNIA

Order Instituting Rulemaking to Develop Additional Methods to Implement the California Renewables Portfolio Standard Program.

Rulemaking 06-02-012 (February 16, 2006)

TURN’S POST-WORKSHOP COMMENTS ON TRADABLE RENEWABLE ENERGY CREDITS (TRECs)

Marcel Hawiger, Staff Attorney

THE UTILITY REFORM NETWORK 711 Van Ness Avenue, Suite 350 San Francisco, CA 94102 Phone: (415) 929-8876 ex. 311 Fax: (415) 929-1132 Email: marcel@turn.org

November 13, 2007

F I L E D 11-13-0704:59 PM

TABLE OF CONTENTS

I. The Benefits Of Tradable Renewable Energy Credits Are Limited, And TRECs

Do Not Eliminate Any Of The Existing Barriers To Renewable Energy Development .... 3

A.TRECs Provide Flexibility And Lower Transaction Costs............................. 3 B.REC Trading Will Not Promote Renewable Energy Development................ 4 C.REC Trading Does Not Significantly Reduce Existing Barriers Limiting New

Renewable Projects......................................................................................................... 7

II. Tradable RECs Could Further Undermine New Renewable Project Development, Increase Consumer Costs and Eliminate the Economic and Environmental Benefits of In-State Renewable Development.................................................................... 8

A.Tradable RECs May Impact Buyer Behavior and Shifts the Risk of Unbundled Energy Prices to Sellers ............................................................................... 8

B.The Boom Cycle of TREC Prices Will Result in High Costs in the Near Future ............................................................................................................................ 10

C.If the Deliverability Requirement is Weakened, TRECs eliminate the Economic, Environmental and Health Benefits of In-State Renewable Projects and Bundled Energy ............................................................................................................ 11

III.RPS Compliance RECs Should Never Be Used as GHG Offsets In a Capped

System 13 IV.The Staff Straw Proposal Should Be Modified Slightly to Limit the Use of

Long-term TRECs and Prevent Competition with the Voluntary Market........................ 16

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TURN’S POST-WORKSHOP COMMENTS ON TRADABLE RENEWABLE ENERGY CREDITS (TRECs)

Pursuant to the schedule established in the October 16, 2007 ALJ Ruling in this

proceeding, the Utility Reform Network (TURN), files these opening comments

concerning the use of Tradable Renewable Energy Credits (TRECs) for compliance with

the Renewable Portfolio Standard (RPS) enacted by SB 1078 and modified by SB 107.

TURN commends the ALJ and staff for preparing a detailed and thorough list of

questions. TURN addresses some of the questions in a narrative format.

The general costs and benefits of RECs were succinctly described in a 2005

Report prepared for this Commission.1 The new information presented at the September

workshops and in comments on the record highlight the fact that TRECs will not lead to

new renewable generation development and will not solve existing transmission

problems, despite vague assertions to the contrary.

While TRECs will provide additional contractual flexibility for ESPs requiring

short term renewable energy for RPS compliance purposes, TRECs may also have

negative consequences. Naïve reliance that TRECs will magically materialize may reduce

the motivation of LSEs to actually engage in the negotiations necessary to sign long-term

contracts. Boom and bust prices for TRECs may raise consumer costs and limit the

usefulness of RECs for new project financing. The use of RECs will eliminate the

physical price stability that is a unique benefit of renewable energy. And over-reliance on

1 See, Center for Resource Solutions, “Achieving a 33% Renewable Energy Target,” November 1, 2005, pp. 124-126. Hereinafter referred to as the “CRS Report.”

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RECs will increase pressure to tap into far flung renewable projects that provide no direct

benefit to California consumers.

Utility shareholders face the prospect of shareholder penalties for non-compliance

with RPS targets. But lack of bundled long-term projects below the MPR serves as a cap

on potential penalties. There is no such cap on REC costs, leading to the potential for

increased consumer costs. Hoarding of RECs and potential market power in the REC

market could increase consumer costs. For these reasons TURN strongly supports the

price cap and shelf life provisions of the staff proposal.

TURN supports the staff straw proposal, but recommends the following

modifications:

• The shelf life of RECs should be limited to one and a half years to be consistent

with standards adopted for the voluntary REC market;

• IOUs should be required to hedge financially the power under long term REC

contracts to provide some of the price stability inherent in long-term fixed-price

renewable contracts;

• The amount of RECs purchased under short term contracts should be limited to a

percentage of the Annual Procurement Target (APT).

In analyzing the potential benefits and pitfalls of instituting a tradable REC

market, TURN is guided foremost by the statutory goal of the RPS legislation – to secure

in-state health and economic benefits. While global greenhouse gas (GHG) reduction is

of paramount importance, we cannot lose sight of the fact that the legislative mandate to

achieve 20% production from in-state renewable generation was passed to benefit

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California residents from reduced local air pollution, reduced energy price volatility and

increased jobs.

If California is to reach its existing 20% RPS targets, and even consider greater

future targets, this Commission must focus on rules that will motivate all LSEs to support

new renewable generation. TRECs may provide some limited flexibility, but to the extent

over-reliance on TRECs may actually hamper new project development and increase

costs, the Commission should be very cautious about authorizing this new compliance

tool.

I. The Benefits of Tradable Renewable Energy Credits Are Limited, and TRECs Do Not Eliminate Any of the Existing Barriers to Renewable Energy Development

A. TRECs Provide Flexibility and Lower Transaction Costs TURN does not dispute that TRECs offer certain benefits, though primarily to the

very lightly “regulated” Energy Service Providers (ESPs), whose business model is based

on short term contracts with customers and short term contracts for power. As discussed

in D.06-10-019, the ESPs argue that they cannot sign long-term contracts. They would

prefer to rely on short term contracting, and TRECs offer the opportunity to match

amounts and terms while minimizing transaction costs.

The ESPs have reached renewable procurement contract amounts of 1-3% of their

loads.2 How the ESPs will move from 1% to 20% in two years is difficult to divine. The

availability of RECs would certainly be a blessing to them.

2 The ESPs filed RPS compliance filings on August 1, 2007. Many failed to disclose the information required (such as retail sales and renewable purchases), arguing that it should be confidential. It is thus impossible to provide a total weighted percentage of renewable

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But the outstanding question of where those short term RECs will come from?

Parties have mentioned that there may be limited amounts of excess renewable generation

available from QFs with expiring contracts, though these amounts are not public and are

likely to be very limited. Distributed photovoltaics may provide one source, though they

require aggregation and it is not clear whether smaller CSI customers will meet WREGIS

metering accuracy requirements.

There is a strong likelihood that if the CPUC authorizes the use of TRECs, the

LSEs will soon be advocating even more strongly to eliminate the current delivery

requirements in order to tap into out-of-state RECs. PG&E and SCE have both

recommended future relaxation of the delivery requirement. PG&E has requested

authority for a shaping and firming agreement for wind power from Oregon.3 It is not

clear whether such contracts comply with the deliverability requirements of Public

Resources Code §25741(a).

B. REC TRADING WILL NOT PROMOTE RENEWABLE ENERGY DEVELOPMENT Some parties have argued that the additional value stream from separate REC

trading will support incremental renewable project development. Dr. Weiss explained

why this claim is theoretically wrong, because financial institutions will not lend based

on expected future REC revenues. The gist of the problem is that future REC prices

evidence a “boom and bust” bimodal distribution, so that there is insufficient certainty

regarding future revenues to satisfy lending institutions.

purchases by the ESPs. The only things reported by all ESPs was the percentage amount of 2006 retail load met with renewable purchases. 3 PG&E Advice Letter 3090-E, filed on July 20, 2007.

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Dr. Weiss discussed how the existence of a compliance market driven by a

numerical requirement results in a vertical demand curve, with high values during

scarcity and low values during excess, since the demand is driven purely by the

regulatory imperative to comply. The non-compliance penalty (NCP) becomes the price

cap.

Mr. Rees, whose company touts itself as the world’s largest environmental broker,

supported Dr. Weiss’ analysis with his observations of the real world pricing of RECs in

compliance markets. Mr. Rees explained that in a compliance market the regulatory tools

that define supply (technology eligibility, banking, geographic eligibility) drive prices,

and the non-compliance penalty “sets a price ceiling.”4

TURN agrees with this analysis.

There should be no dispute that debt financing is available only if future revenues

are sufficiently predictable to incorporate in a debt ratio coverage analysis. It is also

highly likely that equity investors require sufficient revenue certainty to generate required

rates of return. In practice this requires the existence of a forward curve of futures prices.

The REC market does not generate futures prices that converge to any one value.

Dr. Weiss also emphasized that long term contracts for fixed price output are the

main requirement for financing new renewable generation. The following evidence

supports the conclusion that new renewable projects depend significantly on long-term

contracts and that REC prices in a compliance market exhibit a boom-bust cycle:

• In California, the LSEs have signed only one, out of the 89 RPS contracts (as of

August 8, 2007), with a new renewable facility for a period shorter than ten years.

4 Rees presentation, see, especially, pages 7-13.

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Ten other contracts less than ten years are with existing facilities. The remaining

78 contracts are all for terms longer than ten years.5

• In Texas, despite the claim of new renewable generation being constructed due to

REC trading, 83% of new wind capacity was constructed with long-term

contracts.6

• Since 2001, 90% of new renewable capacity in seven states was constructed under

long-term contracts.7

• The price of RECs in Massachusetts in the recent auction for 2008 RECs ranged

from $52.06 to $53.00,8 close to the NCP level of $57, with all the power being

generated from **.

• It appears that most Massachusetts utilities have opted to pay the ACP in the

renewable energy trust rather than signing contracts or purchasing RECs.

Massachusetts is considering instituting a pilot long-term contracting requirement

for the distribution utilities to fill a need for renewables financing even with the

ACP fund mechanism.9

• Aside from New Jersey Class I RECs, the other Green-e certified RECs sold by

Evolution Markets trade at prices below $5/MWh, indicative of low prices in the

voluntary market.

5 “Pre-Workshop Comments of UCS,” August 17, 2007 in R.06-02-012, p. 4, citing to CEC RPS Contract Database. 6 “Comments of TURN on Staff White Paper on RECs,” May 31, 2006 in R.06-02-012, p. 3. 7 Id. 8 See, October 25, 2007 press release from Evolution markets and the Massachusetts Technology Collaborative. See, also, Rees Presentation p. 20. 9 Massachusetts House Bill 3965, the “Green Communities Act of 2007,” Section 62, available at http://www.mass.gov/legis/bills/house/185/ht03pdf/ht03965.pdf

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Dr. Weiss strongly endorsed two elements of California’s RPS – the promotion of

long-term contracts and the use of shareholder compliance penalties – as key factors that

promote the actual increase of renewable energy development.

The emphasis on long-term contracting is not new news for this Commission. The

Commission already concluded that long-term contracting is necessary to support new

renewable generation in D.06-10-019.10 Nevertheless, the Commission allowed very

significant short term contracting for bundled energy for RPS compliance on the theory

that “there is simply no plausible market situation in California in which short-term

contracts for existing renewable power will crowd out long-term contracts for new

generation.”11

C. REC TRADING DOES NOT SIGNIFICANTLY REDUCE EXISTING BARRIERS LIMITING NEW RENEWABLE PROJECTS Many parties in previous comments have off-handedly claimed that TRECs will

solve existing problems due to inadequate transmission capacity from potential renewable

source areas. Indeed, even Mr. Rees claimed in a slide that unbundled RECs “solve

transmission problems.”

There was general consensus at the workshop that this claim is spurious. If there

is a transmission constraint limiting the importation of renewable energy, tradable RECs

do absolutely nothing to solve the underlying problem. In other words, new renewable

energy from Tehachapi will not flow into the grid just because TRECs are authorized if

new transmission is not built.

10 See, D.06-10-019, Finding of Fact 16, mimeo at pp. 23-24. 11 D.06-10-019, mimeo p. 26. See, also, D.07-05-028, mimeo p. 15.

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TRECs do allow an LSE to meet is compliance if there are transmission

constraints but excess renewables in other geographic areas. However, as explained

several years ago, the barriers due to intra-state transmission constraints have been

resolved by the increased delivery flexibility authorized by this Commission in D.05-07-

039.12 LSEs can already use contractual arrangements to purchase renewable energy that

is not delivered into the relevant LDC’s service territory. TRECs do offer other potential

benefits (reduced transaction costs, volume and term flexibility), but they do not remove

the fundamental existing siting and transmission barriers to renewable energy

development.

II. Tradable RECs Could Further Undermine New Renewable Project Development, Increase Consumer Costs and Eliminate the Economic and Environmental Benefits of In-State Renewable Development

A. Tradable RECs May Impact Buyer Behavior and Shifts the Risk of Unbundled Energy Prices to Sellers One of the primary benefits of TRECs is the reduction in transaction costs. An

LSE does not have to conduct lengthy contract negotiations to purchase the output from a

certified renewable generation facility, and does not have to engage in swap transactions

if there are transmission constraints. The LSE simply purchases RECs for the desired

term and amount through a market transaction.

But there is a flip side to this benefit. The LSE, and especially an ESP without

significant experience with unit-specific contracts, could easily relax any attempts to

negotiate bundled renewable energy contracts in the hope of purchasing TRECs to

achieve RPS compliance targets.

12 See, for example, Center for Resource Solutions, “Achieving a 33% Renewable Energy Target,” November 1, 2005, pp. 124-125.

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All of this would be just fine if the requisite RECs materialize in the TREC

market. But there is very little indication that in the short term (next five years through

2012) there will be much excess renewable energy for the REC market. Only a limited

number of expiring QF contracts are RPS-eligible, and there is not public data on the

amount of such expiring QF contracts. There are some RECs from existing DWR

contracts which did not transfer the green attributes to the contract holder. There may be

RECs from new distributed solar generation,13 though it is not clear how easily

distributed PV could be aggregated to meet WREGIS certification requirements.

If TRECs do not materialize and parties reduce their efforts to negotiate long-term

contracts, the achievement of the 20% RPS target will be even more difficult than under

current forecasts. The ESPs will exert political pressure to eliminate their compliance

requirements, or to allow TRECs from distant locations irrespective of delivery

requirements.

In many ways, the use of TRECs is very similar to short term contracting for

bundled renewable energy. However, in addition to removing incentives for LSEs to

engage in serious negotiations, TRECs also impose risks upon sellers and negate the price

stability benefits of renewable power. Given the limited benefits of TRECs, TURN

cautions that the Commission should be extremely careful that authorization of TRECs

for RPS compliance does not further undermine new renewable development.14

13 See, for example, Kamins presentation, p. 12. 14 Indeed, not much has changed since these issues were discussed in a 2005 Report. See, Center for Resource Solutions, “Achieving a 33% Renewable Energy Target,” November 1, 2005, pp. 124-126.

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In practice, this means that REC trading should be extremely limited so as not to

reduce the motivation of LSEs (at least the IOUs) to negotiate and sign long-term

contracts. It means that cost recovery for RECs must be structured so as not to undermine

the driving force of penalties. And it means that even for the ESPs the Commission must

pursue comparable rules that motivate financing of new renewable generation, rather than

allowing ESPs to procure RECs from ever-distant states and/or intermittent power firmed

with dirty new coal. These issues are addressed further in Section IV below.

B. The Boom Cycle of TREC Prices Will Result in High Costs in the Near Future Assuming any TRECs are available, TURN agrees with Dr. Weiss that their price

will likely reach the NCP or the price cap. Utilities, faced with a choice of purchasing

RECs with ratepayer funds or facing shareholder penalties will certainly choose the

former, irrespective of the costs.

Of course, the price for bundled renewable power could likewise exhibit price

escalation when the compliance target kicks in in 2010. However, the MPR offers a

safety valve since the LSEs – effectively only the IOU’s – compliance requirements are

waived if they do not receive bids for long-term power priced less than the MPR.

For this reason TURN strongly supports the staff proposal to set a price cap for

TRECs lower than the NCP. Indeed, TURN recommends that any REC purchases be

compared to bundled contract prices for prudence. The REC prices should be no higher

that bundled contracts for similar terms minus a market price for brown energy.

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C. If the Deliverability Requirement is Weakened, TRECs eliminate the Economic, Environmental and Health Benefits of In-State Renewable Projects and Bundled Energy Tradable RECs could promote market efficiency if parties can purchase RECs

from out-of-state. Several parties made quite explicit in their pre-workshop comments the

fact that ultimately, their desire is to tap into potentially cheaper out-of-state renewable

facilities. Edison explained that the market for unbundled RECs might be quite limited in

California, given that real new projects are financed by long-term bundled contracts.

Edison recommended that the Commission should “consider the issue of relaxing or

removing the in-state delivery requirements of the RPS program for both RECs and

bundled renewable power,” and further argued that “given the absence of any significant

source of RECs in the near term, authorizing the use of unbundled, tradable RECs for

RPS compliance may create a system with a high demand for RECs and little supply.”15

TURN is concerned that SCE is correct. There are likely to be new renewable

wind projects in the Northwest, as well as in Wyoming and other western states, that

might provide a source of short term RECs. If RECs are unavailable from projects that

can deliver to California, parties will press more for a relaxation of the delivery

requirement.

This issue goes to the heart of the purpose of the RPS legislation, as the first

guiding principle is that “REC trading for RPS compliance should be consistent with the

legislative goals for the RPS program.” SB 1078 defined eligible renewable energy

15 SCE Pre-Workshop Comments, p. 9. Other parties made similar statements.

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resources as “in-state renewable electricity generation” facilities16 and explicitly stated

that the goals of the RPS statute were to “promote stable electricity prices, protect public

health, improve environmental quality, stimulate sustainable economic development,

create new employment opportunities, and reduce reliance on imported fuels.”17 The

legislature further emphasized that “the delivery of the electricity generated by

[renewable] resources to customers in California may ameliorate air quality problems

throughout the state and improve public health by reducing the burning of fossil fuels and

the associated environmental impacts and by reducing in-state fossil fuel consumption.”

This Commission has already created a de facto system of unbundled RECs by

allowing parties who purchase bundled renewable energy to deliver anywhere in

California, rather than directly to customers of the load serving entity or to the service

territory of the relevant LDC.

However, there is no evidence that the legislature intended to allow unlimited use

of imported renewable power to satisfy RPS compliance purposes. Since renewable

energy could likely be sited for cheaper in states with less stringent siting regulation, the

unlimited use of unbundled tradable RECs would essentially export all the economic and

environmental benefits out of state. Surely this was not the purpose of a statute designed

to promote “in-state renewable electricity generation facilities.”

Mr. Rees explained that the primary way in which RECs reduce prices (and thus

costs) is with 1) broader geographic eligibility for renewable energy, and 2) eligibility for

16 Public Utilities Code §399.12(b), referencing Public Resources Code §25741(a). The Public Resources Code defines eligible renewable power as either generated by an ‘in-state’ facility or “scheduled for consumption by California end-use retail customers.” 17 PUC §399.11(b).

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older generation.18 Unfortunately, both methods that reduce REC prices – expanding

geographic eligibility and allowing RECs from older existing plants – directly conflict

with the statutory goals of California’s RPS of promoting the development of new

renewable power sources that serve California customers.

Moreover, the use of any unbundled renewable energy credits for RPS

compliance, regardless of whether they are traded or not, eviscerates the benefit of

“stable electric prices” achieved by a long term fixed price contract for renewable

power.19 If an entity purchases RECs, it will still have to purchase market power from the

spot market to serve load. The price of market power is set by volatile gas prices.

Thus, if the Commission allows increased use of TRECs for compliance, it should

concurrently require the IOUs to financially hedge the associated gas price risk through

swap contracts (see Section IV below).

III. RPS Compliance RECs Should Never Be Used as GHG Offsets In a Capped System

The California legislature additionally passed the historic Global Warming

Solutions Act in 2006 (AB 32), which mandates a statewide reduction in emissions to

1990 levels by DATE. This Commission will advise the California Air Resources Board

on methods to reduce emissions within the electric sector. Emission reductions can be

achieved through command and control regulation, market mechanisms, or a combination

of the two. One option under consideration is a cap and trade system, with trading of

18 Rees presentation, see, especially, pages 11. 19 Short term bundled contracts also eliminate the long term price stability benefit, though an annual bundled contract still protects against daily and monthly price volatility.

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emissions allowances. The Commission is separately investigating potential methods of

regulation and allowance allocation in Rulemaking 06-04-009.

Renewable energy purchases due to compliance with RPS will by definition

reduce GHG emissions by displacing “brown power,” thus directly reducing the cost of

purchasing necessary emissions allowances. Renewable green power displaces brown

power within the capped electricity sector. It does not offset emissions in the same way

projects outside the electric sector (for example, forestation, low-emissions vehicles)

might be used to offset power emissions. Any RECs used for RPS compliance should not

be commingled with the notion of emissions allowances or offsets. Any potential use of

RECs as offsets for GHG reduction will require resolution of complex issues concerning

the attributes of RECs, the emissions of null power and proper accounting of emissions.

These issues will be impacted by the form of regulation ultimately adopted. Hasty

resolution at this stage will almost certainly promote market manipulation and double

counting of the benefits of renewable power.

California and the world will be better served if this Commission continues to

focus on ongoing RPS and contracting issues associated with meeting the existing 20%

requirement, rather than spending significant efforts devising complex rules for using

tradable RECs as avoided emissions credits under unknown future market conditions.

A REC should never be presumed to include “avoided carbon emissions” and

should not be used as an offset for any future GHG compliance purposes, irrespective of

the nature of the GHG regulatory mechanism adopted under AB 32 and irrespective of

whether the REC is additional to any existing compliance mechanisms. The EPA’s

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Climate Partners program does not include RECs as an “offset” for GHG emissions.20

The Environmental Resources Trust, a non-profit certifier and marketer of GHG offsets

and RECs, likewise does not consider a REC to contain an “emissions allowance”

attribute.21

An offset is a reduction in GHG emissions accomplished outside of the capped

system that can count as if it accomplishes a reduction within the capped system.

Renewable energy is not an offset. Renewable power displaces emissions by displacing

the need to produce brown power.

In the context of GHG accounting, the renewable energy produces the benefit of

reduced emissions caused by displacing brown power. If regulation (through cap and

trade or carbon tax) monetizes the cost of GHG emissions, the resulting cost of brown

power will be increased. The buyer of renewable energy already obtains the financial

benefit of not having to buy brown power that includes the cost of GHG. On an

accounting basis, the purchaser of renewable energy bundled with the REC already gets

the benefit of obtaining power at a lower total emissions rate. To allow the counting of

the REC as an additional credit would provide double payment.

The situation appears more complicated when RECs are unbundled and REC

trading is introduced, but the underlying reality is still the same, and the change in

accounting does not impact the true nature of GHG emissions.

20 See, http://www.epa.gov/climateleaders/resources/optional.html#offset. 21 See, Environmental Resources Trust, “Renewable Energy Certificates and Air Emissions Benefits: Developing an Appropriate Definition for a REC,” April 2004. Available at http://www.ert.net/ecopower/ERT_REC_Position.pdf.

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An unbundled REC used for RPS compliance represents a certain amount of

renewable energy. The REC for RPS purposes accounts for all of the environmental and

economic benefits of renewable energy delivered to California (price stability, local

economic benefits, GHG reduction, local environmental benefits, etc.). It represents the

entire incremental value of renewable power. As long as an appropriate tracking system

is in place to ensure that the buyer of the unbundled energy does not likewise count the

energy for RPS compliance, the holder of the REC can appropriately represent that they

have paid the incremental value set by the market place for generating renewable power.

IV. The Staff Straw Proposal Should Be Modified Slightly to Limit the Use of Long-term TRECs and Prevent Competition with the Voluntary Market

The staff straw proposal includes the following salient rules for the use of TRECs

for RPS compliance:

• Same rules for all load serving entities

• An annual limit on the use of short term REC contracts only after an LSE signs

long-term contracts or bundled contracts or contracts with new facilities with

annual deliveries equal to at least 0.25% of prior year’s retail sales

• No limit on the use of RECs purchased through a long term REC contract22

• A REC shelf life of three years prior to retirement, including the year in which it

was generated and two years forward

• The same flexible compliance rules apply to TRECs after they are retired in

WREGIS, but TRECs and forward REC contracts cannot be used for earmarking

22 The short term limit specifies that the condition precedent is the signing of “bundled contracts.” It thus appears that long-term REC contracts do not require this condition precedent, but also do not count toward fulfilling the 0.25% condition.

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• A price cap of $35/REC, less than the $50 per MWh statutory non-compliance

penalty23

• REC contracts should be solicited in the annual RFO process and evaluated

against bundled contracts using the utilities’ least cost, best fit evaluation

methodologies

• Long-term REC contracts must be submitted by Advice Letter for authorization

The staff straw proposal treats REC purchases similarly to bundled energy

purchases, with the exception of the three-year shelf life and 35-dollar cost cap. The

proposal does not limit the quantity of RECs that can be purchased as long as the

requirement to procure at least 0.25% of prior year sales with long-term or new facility

contracts is met.

The staff proposal allows unlimited use of long-term REC contracts, and treats

short term REC contracts exactly the same as short term bundled purchases. The proposal

apparently assumes that long-term REC contracts contribute to financing new renewable

power. There is little information available to evaluate this assumption. It may just as

well be true that a developer willing to sell off RECs on a long-term basis has sufficient

certainty that the renewable power will be competitively priced and might proceed with

or without the additional revenue stream from the long-term REC contract.

23 TURN notes that for a plant emitting at the established Emissions Performance Standard limit of 1100 pounds of CO2 per MWh, a cap of $35/MWh corresponds to a CO2 value of $64 per ton of CO2.

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TURN supports the cost recovery provisions which require a comparison of the

RECs against bundled contracts. At this time, there is insufficient data on the intrinsic

extra value of renewable power to set a reasonableness standard for REC prices.

TURN strongly supports the staff’s recommendations that REC shelf lives be

limited and that a cost cap be imposed. TURN recommends the following modifications

to further minimize possible negative cost impacts and the elimination of hedging

protection.

First, TURN recommends that the shelf life of RECs be limited to one and a half

years, rather than three years, to be consistent with the shelf life of RECs in the voluntary

market. The Green-e National Standards for Renewable Electricity Products, revised on

July 20, 2007, stipulate an 18-month REC shelf life.24

The expectation is that in the near term there will be little trading of California

RPS RECs in the voluntary market due to the likely higher prices in the compliance

markets. If there is a surplus in the future, however, prices may swing to the bust cycle.

RECs would be eligible for trading in all markets for 18 months, but then only in the

compliance market for another 18 months. Such a scenario presents arbitrage

opportunities, especially if there is any future relaxation of the deliverability

requirements. Third parties could purchase RECs in the voluntary market but not retire

them, and resell those RECs in the compliance market.

24 Green-E, National Standard version 1.4, Section III.B., p. 6. RECs may be generated in the year sold, six months back or three months forward.

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Second, TURN recommends that the Commission require IOUs25 to enter into

fixed-for-floating swaps, or other financial hedging transactions, to capture the hedging

value of long-term bundled energy contracts. Since the market for such instruments is not

very liquid for more than five years, one could never capture the full hedging value of a

ten or twenty year fixed-price power contract. TURN recommends that utilities with

forward REC contracts of less than five years should hedge power for the same term as

the contract. For forward REC contracts longer than five years, the utilities should use

appropriate instruments, rolling over with time, to hedge over the life of the contract.

It is difficult, however, to determine how to capture any hedging value if an IOU

simply purchases TRECs for compliance purposes, rather than entering into a term

contract for RECs. Hedging could be required over the shelf life of the TREC, or until the

IOU retires the TREC for compliance.

Third, TURN recommends consideration of a limit on total REC usage, especially

in the near term, to protect against boom prices when the 20% requirement sets in. In

their pre-workshop comments, the Union of Concerned Scientists proposed a limit based

on an escalating percentage of the APT, starting with 20% of the APT in 2008 and

escalating at 5% per year. TURN supports such a proposal.

25 Despite the goal of uniform treatment, TURN would not recommend requiring the ESPs to financially hedge their REC purchases.

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November 13, 2007 Respectfully submitted,

By: _____/S/_________________

Marcel Hawiger, Staff Attorney THE UTILITY REFORM NETWORK 711 Van Ness Avenue, Suite 350 San Francisco, CA 94102 Phone: (415) 929-8876, ex. 311 Fax: (415) 929-1132 Email: marcel@turn.org

CERTIFICATE OF SERVICE

I, Larry Wong, certify under penalty of perjury under the laws of the State of California that the following is true and correct:

On November 13, 2007 I served the attached:

TURN’S POST-WORKSHOP COMMENTS ON TRADABLE RENEWABLE ENERGY CREDITS (TRECS)

on all eligible parties on the attached lists to R.06-02-012, by sending said document by electronic mail to each of the parties via electronic mail, as reflected on the attached Service List.

Executed this November 13, 2007, at San Francisco, California.

____/S/_________

Larry Wong

abb@eslawfirm.com ab1@cpuc.ca.govabiecunasjp@bv.com aeg@cpuc.ca.govabonds@thelen.com aes@cpuc.ca.govACRoma@hhlaw.com as2@cpuc.ca.govahendrickson@commerceenergy.com bds@cpuc.ca.govalhj@pge.com blm@cpuc.ca.govamoore@ci.chula-vista.ca.us bwm@cpuc.ca.govamsmith@sempra.com cf1@cpuc.ca.govandy.vanhorn@vhcenergy.com cnl@cpuc.ca.govarno@recurrentenergy.com dot@cpuc.ca.govbbaker@summitblue.com dsh@cpuc.ca.govbcragg@goodinmacbride.com esl@cpuc.ca.govbepstein@fablaw.com jf2@cpuc.ca.govbernardo@braunlegal.com jm3@cpuc.ca.govbfinkelstein@turn.org jmh@cpuc.ca.govbill.chen@constellation.com lmi@cpuc.ca.govbillm@enxco.com mrl@cpuc.ca.govbknox@energy.state.ca.us psd@cpuc.ca.govblaising@braunlegal.com smk@cpuc.ca.govbobgex@dwt.com svn@cpuc.ca.govbrad@mp2capital.combrbarkovich@earthlink.netbrenda.lemay@horizonwind.combrian@banyansec.combshort@ridgewoodpower.comcaliforniadockets@pacificorp.comcase.admin@sce.comcastille@landsenergy.comcathy.karlstad@sce.comcbreidenich@yahoo.comcchen@ucsusa.orgcem@newsdata.comcentralfiles@semprautilities.comchilen@sppc.comclaufenb@energy.state.ca.usclyde.murley@comcast.netcmkehrein@ems-ca.comcpuccases@pge.comcpucrulings@navigantconsulting.comcrmd@pge.comcsmoots@perkinscoie.comcsteen@bakerlaw.comcswoollums@midamerican.comcustomerrelations@sel.comcwooten@lumenxconsulting.comdaking@sempra.comDan.adler@calcef.orgDan@EnergySmartHomes.netdavid.oliver@navigantconsulting.comDavid.Townley@townleytech.comdavido@mid.orgdcarroll@downeybrand.comdcover@esassoc.com

Service List for R.06-02-012

demorse@omsoft.comdennis@ddecuir.comdgulino@ridgewoodpower.comdhecht@sempratrading.comdhuard@manatt.comdiane_fellman@fpl.comdietrichlaw2@earthlink.netdkk@eslawfirm.comdniehaus@semprautilities.comdorth@krcd.orgdougdpucmail@yahoo.comdouglass@energyattorney.comdowen@ma.orgdsaul@pacificsolar.netdseperas@calpine.comduggank@calpine.comdwang@nrdc.orgdws@r-c-s-inc.comECL8@pge.comej_wright@oxy.comek@a-klaw.comelarsen@rcmdigesters.comelizabeth.douglass@latimes.comELL5@pge.comemail@semprasolutions.comemello@sppc.comenergy@3phases.come-recipient@caiso.comericj@eslawfirm.comevk1@pge.comfilings@a-klaw.comfortlieb@sandiego.govfrank.w.harris@sce.comgarson_knapp@fpl.comgary.allen@sce.comgcooper@cpv.comGloriaB@anzaelectric.orgglw@eslawfirm.comgmorris@emf.netgpetlin@3degreesinc.comgrosenblum@caiso.comgtd@cpuc.ca.govgxl2@pge.comhal@rwitz.netharveyederpspc.org@hotmail.comhcronin@water.ca.govhharris@coral-energy.comhraitt@energy.state.ca.usjackmack@suesec.comjamesstack@fscgroup.comjanice@strategenconsulting.comjanmcfar@sonic.netjanreid@coastecon.comjaturnbu@ix.netcom.com

jchamberlin@strategicenergy.comjdalessi@navigantconsulting.comjeffgray@dwt.comjenine.schenk@apses.comjeremy.weinstein@pacificorp.comjgreco@caithnessenergy.comjhamrin@resource-solutions.orgjjg@eslawfirm.comjkarp@winston.comjleblanc@bakerlaw.comjleslie@luce.comJMcMahon@navigantconsulting.comjody_london_consulting@earthlink.netJoe.Langenberg@gmail.comjohnrredding@earthlink.netjoyw@mid.orgjpigott@optisolar.comjpross@sungevity.comjsanders@caiso.comjscancarelli@flk.comjsniffen@elementmarkets.comjsqueri@goodinmacbride.comjudypau@dwt.comjweil@aglet.orgjwiedman@goodinmacbride.comkaren.mcdonald@powerex.comkaren@klindh.comkdusel@navigantconsulting.comKEBD@pge.comkeith.mccrea@sablaw.comkeithwhite@earthlink.netkerry.eden@ci.corona.ca.uskevin@solardevelop.comkjsimonsen@ems-ca.comklatt@energyattorney.comkowalewskia@calpine.comkswitzer@gswater.comkyle.l.davis@pacificorp.comkzocchet@energy.state.ca.uslalehs101@hotmail.comlawcpuccases@pge.comlennyh@evomarkets.comliddell@energyattorney.comlisa.decker@constellation.comlisa_weinzimer@platts.comlizbeth.mcdannel@sce.comlmh@eslawfirm.comlpark@navigantconsulting.comlwrazen@sempraglobal.comlynn@lmaconsulting.comMAFv@pge.commarcel@turn.orgmarcie.milner@shell.comMASullivan@hhlaw.com

mclaughlin@braunlegal.commday@goodinmacbride.commdeange@smud.orgmdjoseph@adamsbroadwell.commfalls@cpv.commhyams@sfwater.orgmichael@mp2capital.commichaelgilmore@inlandenergy.commlemes@smud.orgmmazur@3phasesRenewables.comMMCL@pge.commrw@mrwassoc.commshames@ucan.orgnao@cpuc.ca.govndesnoo@ci.berkeley.ca.usnellie.tong@us.kema.comnrader@calwea.orgnsuetake@turn.orgnxk2@pge.comobrienc@sharpsec.compaulfenn@local.orgpbrehm@infiniacorp.compdh9@columbia.edupepper@cleanpowermarkets.comphanschen@mofo.comphilha@astound.netpletkarj@bv.comporter@exeterassociates.comprocos@alamedapt.compssed@adelphia.netpstoner@lgc.orgpthompson@summitblue.compvallen@thelen.comralf1241a@cs.comralph.dennis@constellation.comramonag@ebmud.comrhwiser@lbl.govrick_noger@praxair.comrkeen@manatt.comrkmoore@gswater.comrlauckhart@globalenergy.comrmccann@umich.edurmccoy@ercot.comrmiller@energy.state.ca.usrprince@semprautilities.comrreinhard@mofo.comrresch@seia.orgrroth@smud.orgrsa@a-klaw.comrschmidt@bartlewells.comrsnichol@srpnet.comrwalther@pacbell.netrwinthrop@pilotpowergroup.comryan.flynn@pacificorp.com

S1L7@pge.comsaeed.farrokhpay@ferc.govsberlin@mccarthylaw.comscottanders@sandiego.edusdhilton@stoel.comsfinnerty@cpv.comsherifl@calpine.comsho@ogrady.usskorosec@energy.state.ca.ussls@a-klaw.comsmindel@knowledgeinenergy.comsnuller@ethree.comspauker@wsgr.comssiegel@biologicaldiversity.orgssmyers@worldnet.att.netstacy.aguayo@apses.comstephen.morrison@sfgov.orgsteve@energyinnovations.comsteven.schleimer@barclayscapital.comsteven@iepa.comsusan.munves@smgov.nettcorr@sempra.comtdarton@pilotpowergroup.comtdillard@sierrapacific.comtheresa.mueller@sfgov.orgthunt@cecmail.orgtjaffe@energybusinessconsultants.comtomb@crossborderenergy.comtomk@mid.orgtroberts@sempra.comvjw3@pge.comvsuravarapu@cera.comvwood@smud.orgwblattner@semprautilities.comwbooth@booth-law.comwhgolove@chevron.comwhitney@mp2capital.comwilliam.v.walsh@sce.comwoodrujb@sce.comwplaxico@heliosenergy.uswww@eslawfirm.comygross@sempraglobal.com