POWER July 2011 - 24

Steven F. Greenwald
I
Jeffrey P. Gray
California's New RPS:
Opportunity Squandered
By Steven F. Greenwald and Jeffrey P. Gray
n April, California Governor Jerry Brown (D) signed Senate Bill
2 (SB2) into law. When it becomes effective later this year,
SB2 will be the primary legislation governing implementation
of the California Renewables Portfolio Standard (RPS) program.
Governor Brown embraced SB2 for " stimulating investment
in green technologies, " " creating tens of thousands of new
jobs, " and " promoting energy independence. " The governor
projected that SB2 would " ensure that California maintains its
long-standing leadership in renewables " and that an RPS target
of " 40%, [and] at reasonable cost, is well within our grasp
in the near future. " The resulting sound bite delivered the desired
political message: By 2020, the percentage of renewable
generation that California utilities must purchase increases
from 20% to 33%-clearly making California's RPS target the
nation's most aggressive.
SB2: Same Old, Same Old
The " green technology " hype aside, SB2 will likely not advance the
development of, or any investment in, RPS power, nor create " green "
or any other types of jobs, within or outside of California. SB2 will
inflate demand for RPS power and concurrently restrict supply-circumstances
that economics teaches will trigger price increases, not
decreases. The uncertainties of California regulation, combined with
the idiosyncrasies of the RPS policies of other states, have deterred
RPS development throughout the West. SB2 adds layers of regulatory
complexity, causing inevitable delay; the California Public Utilities
Commission initiated a rulemaking to implement SB2, but cautions
that it needs at least two years to adopt final rules.
Significantly, SB2 authorizes the utilities to procure " Tradable Renewable
Energy Credits " (TRECs) to satisfy part of their RPS purchase
requirements. In the traditional " bundled " RPS transaction, the generator
sells both the physical power and associated RECs in one integrated
transaction; recognition of TRECs allows the RPS generator to
sell the physical generation to one buyer and separately convey the
REC associated with the generation to a second purchaser. Proponents
promise authorization of TRECs will add flexibility, reduce transaction
costs, increase supply, and thus reduce RPS compliance costs.
However, SB2 purposely limits a utility's TREC purchases to no
more than 10% of its total RPS MWh. It establishes a " Bucket " priority
for different RPS products and accords TREC purchases the lowest-priority
Bucket 3 (subject to the 10% cap). In contrast, bundled
transactions are awarded " Bucket 1 " priority, and are thus guaranteed
a minimum of 75% of the RPS market and are eligible to fill the utility's
entire RPS obligation (negating any TREC transactions).
SB2's Discrimination Harms Western
Energy Development
SB2's relegation of TRECs to Bucket 3 effectuates an almost identical
restriction on out-of-state RPS generation. With respect to almost
every possible commercially viable transaction, SB2 dictates that
out-of-state RPS purchases be subject the 10% TREC limitation. The
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net effect is that California utilities must satisfy their RPS obligations
with only the smallest amount of non-California generation.
California's xenophobia against out-of-state RPS resources has
been criticized and faces likely judicial challenge. Former Governor
Arnold Schwarzenegger (R) vetoed similar legislation adopting a 33%
RPS target, finding it would restrict the " importation of cost-effective
renewable energy from other states. " Opponents have asserted that
the discrimination against out-of-state RPS generation violates the
Commerce Clause in the U.S. Constitution.
Moreover, the policy bias against out-of-state generators is misdirected.
California has a legitimate interest in promoting the development
of new in-state RPS generation. However, SB2's near prohibition against
out-of-state RPS generation will not add 1 MW of new RPS capacity
within California. The simple realities are: California cannot satisfy its
physical power or RPS requirements solely with in-state generation, and
restricting purchases of out-of-state power will not streamline the permitting
and construction of RPS projects within California.
Similarly, Governor Brown's goal to increase green investment and
employment does not necessitate SB2's discrimination against outof-state
RPS generation. The market for commercially viable green
technology developed in California is not limited by state boundaries.
California projects offer temporary employment gains during
construction; however, SB2's premise that state-of-the-art solar or
wind projects equate to " tens of thousands " of permanent California
jobs is anachronistic, reminiscent of staffing for fossil-fuel or
nuclear projects from the last century (and Governor Brown's first
tenure). Moreover, " green technology " employment is not dependent
on geographic proximity with the generating facility. Professionals
employing computer technology in Silicon Valley can optimize the
performance of wind turbines in Montana to most cost-effectively
generate RPS power.
SB2 is symptomatic of California's misguided energy objectives.
The promise that SB2 will promote California " energy independence "
(whatever that may mean) is disingenuous. California is not, has not
been, and can never be an " energy island unto itself. " Insulating
in-state producers from out-of-state competitors has never benefited
California consumers and will not lead to " prices dropping. "
Political gimmickry, such as SB2, is unnecessary to ensure that
California retains its RPS " leadership. " The policy preferences of its
citizens, combined with the enormity of its electric load, make California
a natural leader. Importantly, RPS leadership is not only a benefit;
it also imposes responsibility. Governor Schwarzenegger got it
right! California's RPS and other energy initiatives must be directed
at and be consistent with " a regional effort that optimizes [RPS and
other energy] resources throughout the West at a lower cost to " electric
consumers. ■
-Steven F. Greenwald (stevegreenwald@dwt.com) and Jeffrey P.
Gray (jeffgray@dwt.com) are partners in Davis Wright Tremaine's
Energy Practices Group. Davis Wright Tremaine represents both
California and out-of-state generators who desire
to sell RPS power to California utilities.
www.powermag.com
POWER | July 2011
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POWER July 2011

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