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California Climate Fees on Gas Stir Confusion

A section of California's global climate change law (AB 32) empowers state air pollution regulators to charge fees on providers of fuels that contribute to the state's greenhouse gas (GHG) emissions. But it is still unclear how officials intend to collect an estimated $54 million in fees during the next three years. Natural gas and electric utilities are confounded with the user-fee approach to paying for the six-year implementation of the Global Warming Solutions Act of 2006.

The confusion starts with California Air Resources Board (CARB), whose staff is proposing to use a different method for assigning responsibility for the implementation fees than is being contemplated for assigning longer-term responsibility for reducing GHG emissions. The CARB board will formally consider the staff's proposed regulation when it meets in late June, and then that approved approach would have to undergo state administrative review before the rules can become effective.

If the current schedule holds, fees would begin being collected in the first half of next year, according to CARB officials.

Late last month Kern River Gas Transmission Co. warned shippers that they should brace for the possible collection of GHG emissions fees by the pipeline on behalf of the CARB, which is charged with implementing AB 32 and given a means of paying for it with a user fee.

If CARB's fee implementation proposal were adopted, Kern River said that as a federally regulated pipeline it will seek to collect the fees following appropriate tariff modifications approved by the Federal Energy Regulatory Commission. The pipeline said it opposes the CARB proposal to make it a collection agent and has submitted comments to that effect. A hearing in the fast-track proceeding is scheduled for June 25 and 26. Fee implementation regulations are expected to be in place by July 1.

"The actual statute (AB 32) provides a mechanism to support the GHG reduction program, giving CARB the authority to adopt regulations to collect fees to pay for implementation of the program," said Jon Costantino, CARB climate change planning section manager. "We concentrated on implementing the statute the first couple of years [2007-08] and didn't worry about regulation. We had loans from other special funds to operate, and now we're putting the regulations together so we can pay for all the positions of the staff and contractors working on AB 32."

Although it was in a scoping plan adopted earlier this year by CARB, which outlined how it would proceed with the implementation, the administrative fee issue didn't receive much notice, given that it was buried on (page 112) in the document.

About $54 million of estimated costs of a total $94 million budget for the implementation of AB 32 through 2012 has been targeted to be paid by various sectors of the economy, proportional to their GHG emissions. Natural gas imports have been calculated to be responsible for 30% of the $54 million, or more than $16 million.

According to materials from an April 20 workshop -- which are available at -- the preliminary 2009-2010 "cost per unit product" pass-through for natural gas would be $0.0007/therm (or seven-tenths of a cent/MMBtu) for natural gas, which includes the AB 32 program cost as well as a loan repayment. The first payments of the fees, based on 2008 GHG emissions, are to be due by June 30, 2010.

"These fees are not aimed at GHG emission reductions; we're not going to try to pay for renewable portfolio standard [RPS] requirements," Costantino said. "It is not about trying to get money to change behavior and begin lowering emissions; it is just to support the state having a program to reduce GHG emissions."

In assessing the fees, CARB staff has tried to cover fuels that contribute to different proportions of the state's overall GHG emissions, and with natural gas, "every therm that is burned in the state" is theoretically going to be covered by the regulations and fees, Costantino said. "We don't want to go down to every house, boiler and every end-user, so instead we're assessing the fee upstream in the economy where it is brought in, so you have interstate pipelines, in-state pipelines, dedicated gas fields with pipelines to end-use generation plants and the utilities."

CARB is estimating the number of potential fee-payers in the natural gas part of the regulations is less than 100 entities, and it thinks it "will cover all the gas," regardless of its end-use, Costantino said. Pacific Gas and Electric Co. (PG&E). challenges the assumption that the targeted upstream gas sources have any responsibility for GHG emissions.

"The draft regulation incorrectly defines upstream entities as sources of GHG emissions and requires these upstream entities to pay the administrative fee," wrote PG&E Environmental Affairs Director John Busterud in a letter to CARB Chairman Mary Nichols on March 13. "As an upstream provider of natural gas [at PG&E], an operator of a 'public utility gas corporation is not a source of statewide GHG emissions.' A public utility gas corporation transports natural gas from a point of origin to end-users of that natural gas where combustion and emission of GHG ultimately occurs."

Southern California Edison Co. expressed concerns about equality, suggesting that the same allocation methods used in the proposed baseline and compliance parts of reining in GHG emissions be used in assessing the administrative fees. Similarly, Sempra Energy's Southern California Gas Co. (SoCalGas) utility has suggested that CARB use a "point of combustion" as the means of collecting the administrative fee just as it thinks should be the case with any ultimate cap-and-trade system for GHG emissions.

"If utilities, pipelines and/or other upstream entities are required to collect AB 32 fees, it should be made clear that they are being required to do so on CARB's behalf to collect a fee that has been imposed at the point of combustion to maximize administrative efficiency and minimize costs," a SoCalGas spokesperson said.

One other sticky issue for the gas sector raised by PG&E is the risk of counting natural gas twice in assessing the CARB fees. "PG&E appreciates CARB's acknowledgment of this issue and [its] intention to resolve it prior to the adoption of the final regulation [now scheduled for June 25-26]," Busterud said in his letter. He cited the example of intrastate gas transfers between PG&E and SoCalGas having the potential to be counted twice; storage injections/withdrawals have the same potential.

Those identified as on the hook for the fee are all utilities, selected gas users and interstate pipelines and operators. Intrastate pipelines delivering supplies directly to end-users would also have to pay a fee. Others sharing in the overall $54 million in costs will include refineries, cement plants, electricity importers and burners of coal. The only segment of the economy with a bigger portion of the fees than natural gas is the gasoline industry (34%, or $19.2 million).

"CARB intends to collect its program fees directly from emitters of GHG in the manufacturing, refining and electric generation areas. However, in addition, CARB has proposed to reach upstream to entities such as state electric and gas utilities and interstate pipelines, like Kern River, to use those entities as a collection agent for its program fees," the pipeline said in a shipper notice Wednesday. "Under the current proposal, CARB's fees would be collected through Kern River after requiring Kern River to report to CARB the number of therms delivered to end-users -- as defined by CARB -- within the state of California. Pipelines such as Kern River would be required to report the therms delivered, for the previous year, which will establish the basis for the next year's fee. Kern River would recover these fees from the customers implicated."

In September 2006 California Gov. Arnold Schwarzenegger signed AB 32, authorizing CARB to adopt a schedule of fees to be paid by sources of GHG. Last December CARB approved the blueprint for implementation of AB 32.

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