US: Largest California gas distributor calls for flexible trading rules

California’s biggest natural gas distributor Southern California Gas Company (SoCalGas), set to enter the state’s cap-and-trade system in 2015, has asked for more flexibility in trading carbon than is currently granted to certain power utilities.

Investor-owned power utilities (IOUs) such as Pacific Gas & Electric and Southern California Edison, covered by the programme since its start in 2013, cannot trade via brokers and have to buy offsets for which the seller assumes the invalidation risk. The rules were put in place by the California Public Utilities Commission (CPUC).

With natural gas distributors set to enter the programme from 2015, together with transport fuels providers, the CPUC has started the process to extend the trading rules, according to Tanya Peacock, environmental policy manager at SoCalGas. A first comment deadline has been set for 10 April.

Ahead of the deadline, at the Navigating the American Carbon World conference in San Francisco last week, Peacock called for more dynamic rules to be applied to the gas distribution sector than exist for IOUs.

“The current rules on the electric side mirror more the power market model… We are looking for more flexibility on the gas side in terms of our ability to transact,” she said.

As rules governing gas trading are more flexible than rules governing power trading, this should be reflected in the rules for carbon trading, she argued.

”It’s the way that we are used to transacting on the gas side that forms the basis of our argument. We don’t have the same restrictions in terms of gas procurement that there are on the power side,”

The commission did not reply to ICIS request to clarify the issue.

Brokers and offsets

SolCalGas would like to see several changes to the rules when applied to gas distributors.

Firstly, SoCalGas would like the option of trading trough brokers, as the bulk of market liquidity goes through them, Peacock said.

The company, a subsidiary of Sempra Energy, is expected to have a compliance obligation of around 22m tonnes of CO2 equivalent per year. Under draft rules, it will receive free California carbon allowances to cover 100% of its 2011 emissions, but it would have to sell a share of these at auctions and buy back its short position on the market ( see EDCM 24 March 2013 ).

Secondly, Peacock would like to see more room for the use of offsets. IOUs have to publish a request for offers to buy them, a process whereby they ask developers to submit their offset offers and then choose among them.

”That’s not a model that we use on the gas side. Most of the gas deals are bilateral transactions so we would like be able to follow the same model for offset procurement,” she said.

“Right now, with the current structure for electric utilities with the RFO process, it’s only five or six players who can really participate in that process, so it’s really limiting the market and the options that utilities have in terms of products that are available and the price that they pay,” she added.

The company also wants exemption from having to buy golden offsets only, currently the most expensive offset product on the market.

“We would like to be able to have the flexibility to manage the risk [and to] take more of a portfolio approach and use a variety of different instruments that include CCO8s and CCO3s,” she said.

CCO8s and CCO3s are cheaper offset credits, with their discount to golden offsets based on the fact that their invalidation risk remains with the buyer and as they can be invalidated for up to eight years from issuance (CCO8s) or three years if verified twice (CCO3s). Silvia Molteni