State and Local Energy Policy

Schatzki, Todd, and Robert Stavins. 2018. Discussion Paper: GHG Cap-and-Trade: Implications for Effective and Efficient Climate Policy in Oregon. Harvard Project on Climate Agreements. Abstract
Like many other states, Oregon has begun to pursue climate policies to attempt to fill the gap created by the lack of effective climate policy at the Federal level. After adopting a variety of policies to address climate change and other environmental impacts from energy use, Oregon is now contemplating the adoption of a greenhouse gas (GHG) cap-and-trade system. However, interactions between policies can have important consequences for environmental and economic outcomes. Thus, as Oregon considers taking this step, reconsidering the efficacy of its other current climate policies may better position the state to achieve long-run emission reductions at sustainable economic costs.
The utility business model and power generation industry are built upon a century-old legal regime. Federal and state laws are premised on power flowing from large-scale infrastructure to captive consumers paying regulated rates to a monopoly utility. Today, electric power and money can flow in the opposite directions. Services supplied through utility-owned distribution grids, including storage, energy production, and demand response, upend long-standing industry assumptions about infrastructure investments, consumer behavior, and rate setting. In doing so, distributed energy resource (DERs) threaten incumbent businesses and challenge entrenched regulatory regimes. Regulation of the electric industry is pervasive and will determine where DERs are deployed, the services they may provide, the prices they are paid, and who is allowed to own them. A threshold issue in addressing the future of DER regulation is the roles that federal and state regulators will play in making these decisions. This paper pieces together, from numerous FERC orders and federal court decisions, how the Federal Energy Regulatory Commission’s (FERC) jurisdiction over interstate wholesale energy sales and transmission service applies to DERs. It finds that FERC has disclaimed authority over DER sales that offset a ratepayer’s retail consumption but federal law applies to other sales. FERC’s current approach to these other energy transfers splits authority with state regulators based on various factors, including technology and location on the grid. This fragmented regulatory regime could doom DERs to segmented markets, preventing the creation of a coherent framework for DER development. This paper suggests that FERC should simplify the overlapping web of state and federal regulation by disclaiming jurisdiction over DER energy sales. Doing so would allow states to regulate sales by all types of DERs to local buyers, such as a utility or aggregator. States would then have clear authority to develop comprehensive DER development models. It would also free FERC from the potentially onerous task of directly regulating millions of small-scale resources, while allowing FERC to invite aggregations of DERs to sell directly into regional wholesale markets.
California’s Greenhouse Gas (GHG) cap-and-trade program is a key element of the suite of policies the State has adopted to achieve its climate policy goals. The passage of AB 398 (California Global Warming Solutions Act of 2006: market-based compliance mechanisms) extended the use of the cap-and-trade program for the 2021-2030 period, while also specifying modifications of the program’s “cost containment” structure and directing CARB to “[e]valuate and address concerns related to overallocation in [ARB’s] determination of the allowances available for years 2021 to 2030.” The changes being considered by CARB will not only affect the program’s stringency, but also its performance by affecting the ability of the “cost containment” structure to mitigate allowance price volatility and the risk of suddenly escalating allowance prices. We address key design issues that were identified by the legislature in AB 398 and have been identified by CARB in its “Preliminary Concepts” white paper, including: (1) Price levels for the Price Ceiling and Price Containment Points; (2) Allocation of allowances between the auction budgets, Price Containment Points, and Price Ceiling; (3) “Overallocation” of GHG allowances; and (4) the program’s administrative and operational rules, such as procedures for distributing allowances to the market from the Price Ceiling or Price Containment Points, procedures for using allowances once distributed, and banking rules.
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