Electric utilities waging a power struggle

Fighting global warming is the feel-good cause of the moment.

But in California, the self-congratulation that followed the 2006 passage of the nation’s first comprehensive law to curb emissions of planet-warming greenhouse gases is fast turning to acrimony.

A ferocious behind-the-scenes brawl over how to regulate electricity plants, the biggest source of carbon dioxide after motor vehicles, has pitted Southern California’s public power generators against its for-profit utilities.

Why? Because some taxpayer-owned utilities, such as Los Angeles’ Department of Water and Power, get close to half their electricity from the nation’s dirtiest energy source: coal.

And under the system envisioned by Gov. Arnold Schwarzenegger to implement the greenhouse gas law, utilities would probably be required to buy the right to pollute from the state.

On Monday and Tuesday, the state’s utilities and energy commissions will hold public workshops in San Francisco on proposals that could make high-carbon polluters such as the DWP, the nation’s biggest municipal utility, pay dearly. Investor-owned companies with cleaner nuclear and hydroelectric power could reap windfalls since they might pay proportionately less. And, overall, the money the state collects could be redistributed based on which utility sells the most electricity -- and investor-owned ones such as Southern California Edison are atop that list.

A decision on how to control greenhouse gases from utilities will be made by the California Air Resources Board at the end of the year. But scenarios under consideration have Los Angeles Mayor Antonio Villaraigosa and DWP chief H. David Nahai on a lobbying streak in Sacramento. Nahai recently accused the utilities and s of promoting “a scheme to line the pockets of large corporations” and “shift billions of dollars away from our communities and our customers and into the pockets of for-profit utilities.”

Los Angeles’ customers, who thus far have benefited from some of the lowest rates in the state, could shell out $450 million to $700 million a year -- money that the utility was planning to spend building wind and solar plants. Smaller coal-reliant cities, such as Anaheim, Burbank and Pasadena, also could pay high fees. Customers’ bills could soar under such a plan, municipal utility directors, including Nahai, warn.

California’s battle over the design of this “cap-and-trade” system, which would also allow industries to buy and sell pollution permits among themselves, has erupted as Congress appears likely to adopt a similar market-based system nationwide. Utilities around the country are jockeying for position on the penalty-versus-windfall balance sheet.

Michael Peevey, president of the California Public Utilities Commission, which is charged with recommending global-warming rules for the electricity industry to the air board, dismisses Los Angeles’ complaints, saying its officials “are fighting with phantoms. . . . They’re doing a preemptive strike to carve themselves out” of a statewide program.

“There’s no free lunch,” Peevey warns. “We have to reduce CO2 by 174 million tons by 2020. But no one wants to face up to the cost. Everyone wants everyone else to pay.”

California’s law requires cutting greenhouse gases to 1990 levels by 2020, about 25% below expected levels in that year, and aims to reduce them by 80% by midcentury. A draft plan on how to meet those goals will be released in June by the air board.

Under a cap-and-trade program, the state would impose a ceiling on emissions. Emissions permits would either be given away, auctioned or some combination of the two. Companies whose emissions are below the ceiling, or cap, could sell their pollution permits to industries that pollute above the cap. The system has been launched with mixed success in Europe, where it has been undermined by dubious emissions accounting.

Monitoring smokestacks inside California is the easy part of the regulation. But the power that California imports from states such as Utah and Arizona presents a problem.

Because California has no authority to clamp down on coal plants in other states, the utility and energy commissions are recommending that the air board regulate “first deliverers” who bring the power to the border of the state -- be they utilities or middlemen, such as the former Enron, who market imported electricity.

But Nahai calls that “bad policy, ripe for gaming and manipulation.” He adds, “First deliverers can be faceless foreign companies beyond our control, with no assets and no interest in keeping the lights on.”

Gary Stern, an economist for Southern California Edison, which supports the first-deliverer rule, acknowledged that out-of-state generators could obscure the source of their emissions from California regulators.

“If I want to buy power from Utah, then the Utah company can arrange a deal to sell coal to the Northwest, and buy hydro from the Northwest and sell it to us. It will look clean, and we won’t know that it sold coal.”

But he said that the rule would at least prevent California-based generators from gaming the system.

To critics, the complexities of cap and trade recall the sort of wheeling and dealing that cheated California out of millions of dollars when it deregulated the power system in the late 1990s.

Legislative leaders want Schwarzenegger to withdraw the utility and energy commissions’ preliminary design. It’s “a scheme that gambles with California’s energy supply in a way reminiscent of the events leading to the energy crisis,” Assembly Speaker-elect Karen Bass (D-Los Angeles) and several other legislators representing the city wrote the governor.

Under scenarios to be considered, the state might auction 50% to 100% of emissions credits that utilities will need.

If that happens, the state could collect billions of dollars a year from polluters, and as Air Resources Board Chairwoman Mary Nichols notes, “A big pot of money means someone has to figure out what to do with it, and that involves politics.”

Pacific Gas & Electric wants the money to be redistributed to utilities according to their size. And that would enable the utility to cut rates.

“We’re looking out for our customers who have invested in clean energy for decades,” said PG&E; spokesman Keely Wachs.

But if utilities first have to pay for pollution credits and then to build renewable energy plants, Nahai says that would “cripple” the city’s effort to green itself. In the last two years, the DWP has boosted its renewable energy mix to 8% from 3% and is on target to get 20% of its power from renewables by 2010, an expensive undertaking.

Nichols, of the Air Resources Board, sees an auction system as the most efficient way to achieve greenhouse gas reductions and says she would be reluctant to exempt the Los Angeles utility from a cap-and-trade program, as Nahai has asked. Of the state’s major utilities, “DWP is the biggest CO2 polluter,” Nichols said. “Having this forced on them could be the best thing that ever happened to them.”

Compromises are being discussed. Nonetheless, she acknowledges, “I don’t see us coming up with a system that involves PG&E; making a profit on DWP’s misfortune. You could have an auction where the state keeps 5% of the revenue and 95% stays at DWP, as long as they show they will use it to reduce carbon.”

In the end, given the fact that half of California utilities’ carbon emissions come from imported power, many experts see a broader system as the only way to make cap-and-trade work. A bigger tent would make it more difficult for coal plants to escape regulation.

“We need national legislation for the electricity markets,” Nichols says. “Electrons don’t carry little flags as they move around.”

Regional compacts in the West, Midwest and Northeast have already been formed to design multistate trading programs.

And the cap-and-trade climate bill, sponsored by Sens. Joe Lieberman (I-Conn.) and John Warner (R-Va.), is expected to come to a vote in June, although final legislation may have to await the election of a new president.

Meanwhile, California is moving full speed ahead, trying to bob and weave around the regulatory complexities.

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margot.roosevelt @latimes.com