US: Most natural gas IOUs have not submitted paperwork to transact on secondary market

Most natural gas investor-owned utilities (IOUs) have not submitted the necessary paperwork to purchase carbon allowances or offsets through brokerage firms or on exchanges.

Natural gas and fuel suppliers joined the California cap-and-trade programme when it expanded this January. As part of their inclusion, natural gas IOUs are required to consign at least 25% of their freely allocated allowances to Air Resources Board (ARB) auctions.

The California Public Utilities Commission (CPUC), which regulates the state’s utility companies, also gave natural gas IOUs the option of buying allowances or offsets through brokerage firms or on exchanges (see EDCM 18 December 2014). However, to do so, those entities had to submit an advice letter to the CPUC outlining the brokers or exchanges they wished to use and other market-related information.

Multiple brokers said they have not done any business with natural gas suppliers yet, and only one company appeared to have filed the necessary paperwork to purchase allowances or offsets through those avenues.

Southern California Gas submitted an advice letter to the CPUC that outlines its desire to purchase allowances or offsets on the Intercontinental Exchange and through brokerage firms Evolution Markets, TFS Brokers and Amerex Brokers.

San Diego Gas & Electric (SDGE), Pacific Gas & Electric and Southwest Gas Corporation have not submitted similar letters, according to their company website and spokespeople. The CPUC did not respond to questions about advice letters from the other IOUs.

Delayed reaction

Market participants said natural gas IOUs may be waiting to see how the carbon market develops before purchasing allowances or offsets through either method.

“Just because they are allowed to, unfortunately, has not made them active,” a broker said of natural gas IOUs. “At some stage, they likely will, but it will probably just take a while.”

A trader at a trading house said natural gas IOUs are likely to use the purchasing flexibility to buy offsets, specifically credits with protection against invalidation. The CPUC requires power-sector IOUs, such as Southern California Edison, to purchase offsets through a request-for-offers process, which is seen as more burdensome, rather than bilateral deals.

Market participants said natural gas IOUs could limit their activity in the secondary market by purchasing consigned allowances back at the ARB-run auctions. Those sources said it could be the simplest path to compliance. Dan X. McGraw