[January 6, 2012 / No. 1162]

Top Five Stories of Last Year; Predictions for the Cataclysm Ahead

Most of us safely got past 11-11-2011, but the New Age take on Mayan prophecies is that 2012 presents the real existential threat. Will the Earth be swallowed by a gigantic black hole? Will the Detroit Lions win the Super Bowl? What if smart meters begin to control our thoughts? (Cue computer voice: "PG&E is great. Send PG&E a check in the mail. PG&E is great.")

Here's a look at the top stories of last year and predictions for the year ahead:

1. Green Tangles -- the 33 Percent RPS Passes

With a new governor, Jerry Brown, California's Legislature moved quickly to pass a 33 percent renewables portfolio standard after failed attempts under the previous administration of Arnold Schwarzenegger. Not surprisingly, the new RPS law is largely union-friendly, mandating that 75 percent of all generation must either "directly connect" to a California balancing authority or else entail a dynamic transfer -- measures designed to increase the amount of generation built inside California. The limit on tradable renewable-energy credits is 10 percent.

Prediction: There's been a lot of talk about "cleanup" legislation on the 33 percent RPS, but that's a difficult road considering the balancing act among utilities, unions and energy producers it took to pass the law. As perhaps the chief example of why the law is not likely to change, consider the CPUC's approval a few months ago of the expensive Abengoa Mojave Solar Project. If Abengoa were an out-of-state project, it would have been voted down immediately. Perhaps it was a combination of project viability and the desire for construction jobs that made such a financially foolish project so politically irresistible. A more liberal use of TRECs will have to wait either until rate shock arrives or because many in-state renewable-power projects are facing substantial delays or project uncertainty (Calico Solar and Solar Millennium, anyone?).

2. San Bruno Fallout

In terms of regulatory repercussions, the September 2010 pipeline explosion in a San Bruno neighborhood that killed eight and destroyed dozens of homes was the equivalent of the 2001 energy crisis for natural gas utilities.

It is difficult to briefly sum up the impact of the explosion, which led to a fundamental overhaul of how utilities and the state monitor and report pipeline safety. The explosion produced state and federal legislation on pipeline safety, the overdue exit of PG&E Corp. CEO Peter Darbee, a fine of $38 million for PG&E's 2008 Rancho Cordova explosion, an imbroglio over poor record-keeping, and so on. In addition to the hundreds of millions PG&E already has spent dealing with the tragedy, and its future liability for lawsuits related to the disaster, California's gas investor-owned utilities are poised to spend billions on testing and/or replacing aging pipelines.

Prediction: More tests, more fines.

3. Greenhouse-Gas Lawsuits

California's RPS and greenhouse-gas laws provoked concern last year from a variety of parties that the state could be running afoul of the U.S. Constitution's Commerce Clause by discriminating against out-of-state energy producers. It turns out their concerns had some bite: On Dec. 29 a federal judge issued an injunction against the low-carbon fuel standard on Commerce Clause grounds.

Prediction: Out-of-state energy producers and others adversely impacted by cap and trade will challenge AB 32 in court on Commerce Clause grounds.

4. Market Gaming Returns

"Traders are wired to find a gap and put as much money through that gap as possible," CPUC Commissioner Mark Ferron said at a November meeting.

Ferron was speaking in the context of the 33 percent RPS, and in favor of strict regulatory oversight of out-of-state transactions, but he could have easily been speaking of manipulation in Cal-ISO's wholesale markets. In the spring, the grid operator discovered that traders had been exploiting a loophole in market-settlement calculations related to bid-cost recovery, in which generators recoup startup, minimum-load and energy-bid costs. Generators earned about $57 million in overpayments; ratepayers got the bill. Cal-ISO filed a tariff fix with FERC, but once that loophole was closed, generators employed new strategies to earn another $17 million in payments between April and June.

Prediction: This is nowhere near the 2000-2001 energy crisis, but the second round of manipulation at least may be enough for FERC to fine a few guilty parties [Chris Raphael].

5. Shale Gas

A boom in shale-gas drilling kept natural gas prices at record lows, but also led to environmental concerns such as water contamination.

Prediction: With no new federal regulations in the offing, more states will consider regulating fracking, while researchers call for and undertake studies to determine the possible impacts of shale-gas development on human health and the environment. These studies will likely indicate that the major problem is poor well completion, rather than the actual fracturing operation [Jude Noland].

Bottom Lines is excerpted from Energy NewsData's California Energy Markets publication. If you aren't a current subscriber, see for yourself how NewsData reporters put events in an accurate and meaningful context -- request a sample of California Energy Markets.

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