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1




August 12, 2008


VIA WEBSITE (ELECTRONIC) AND U.S. MAIL (HARD COPY)



Janice Adair

Special Assistant

Washington Department of Ecology

Chair, Western Climate Initiative


Steve Owens, Director

Arizona Department of Environmental Quality

Co
-
Chair, Western

Climate Initiative


Re:

Comment on the Western Climate Initiative (WCI) Draft Design of the Regional Cap
-
and
-
Trade Program (July 23, 2008)

Comments from El Paso Corporation



Dear Ms. Adair and Mr. Owens:


El Paso Corporation (El Paso) respectfully sub
mits the attached comments on the

Draft Design of
the Regional Cap
-
and
-
Trade Program released on July 23, 2008
.

El Paso Corporation (NYSE: EP) provides natural gas and related energy products in a safe,
efficient, and dependable manner. We are organized ar
ound two core businesses


pipelines and
exploration and production. We own North America’s largest natural gas pipeline system,
transporting approximately one quarter of the natural gas consumed in the U.S. each day.
W
ith
respect to Western United States
, El Paso transmits, from supply areas in the San Juan, Permian,
Anadarko and Rocky Mountain regions, approximately 40% of the natural gas consumed in
California, Arizona, New Mexico and Colorado in 2006. Our exploration and production
company ranks among

the top 10 domestic independent natural gas producers operating in key
onshore and offshore basins.

As an industry leader, we share the concerns being expressed by public and governmental
stakeholders over the issue of greenhouse gases (GHGs). El Paso h
as been actively participating
in national policy discussions and has instituted internal guiding principles on the issue of
addressing climate change
1
.
We have announced that it is our goal to make that our multi
-
billion
dollar Ruby pipeline from Wyoming

to the California/Oregon border be a carbon
-
neutral project,
to be achieved through a number of GHG reduction/mitigation measures.

To El Paso’s
knowledge, the Ruby project represents the first effort by a major natural gas pipeline to
incorporate such GHG

mitigation efforts into its plans. We are also members of the California




1

http://elpaso.com/CSR/neighbortohave.html




2



Climate Action Registry (CCAR), and have the honor of being the first natural gas transmission
company to certify our California GHG emissions. Being an industry leader, we unders
tand the
regulatory, technical and the commercial complexities associated with natural gas
-
related GHG
emissions. We have participated in and communicated our experiences and recommendations
under both the AB 32
2

and Western Climate Initiative (WCI) rule d
evelopment. Additional
leadership credentials are included in Attachment 1.
Our
detailed
comments related to the


Draft
Design of the Regional Cap
-
and
-
Trade Program
” are included in Attachment 2

and are
summarized below:


1.

Scope of the WCI program:


a.

Gener
al Regulatory Framework

El Paso believes that WCI should design a program that is as consistent as possible with the
federal proposal that is most likely to be adopted in the future. WCI should adopt or incorporate a
“sunset” provision to merge into a futu
re national program. A recent research conducted by Point
Carbon
3

supports our assertion related to efficiencies of the carbon market and a single national,
consistent cap and trade program.


b.

Regulation of Natural Gas Sectors:


The draft recommendations
4

o
f the WCI are inconsistent with recommendations of the California
Public Utilities Commission (CPUC) and the Pew Center on Global Climate Change (Pew)
5

with
respect to regulating the natural gas sector. The WCI should adopt the well
-
reasoned position of
th
e CPUC and the Pew on this issue


2.

Point of Regulation


El Paso supports WCI’s decision on the downstream concept whereby industrial sources (both
process and combustion) with emissions above a certain emissions threshold are regulated at the
point of emiss
ions.


However, we do not support the “upstream” regulation for residential, commercial,
and

industrial
fuel combustion at facilities with emissions below the applicability threshold by regulating the
entity where the fuels enter commerce in the WCI Part
ner jurisdictions


3.

Thresholds

for coverage under the cap
-
and
-
trade program


El Paso recommends using a 25 MWe equivalent threshold instead of the 25,000 tonnes per year
of CO
2e
for the large industrial and electrical combustion sources. suggested using thi
s threshold




2

Multiple comments filed with the Western Climate Initiative, California Public Utility Commission, California Energy Commissi
on and California Air Resource
s
Board

3

Preemptive Strike: The Future of Regional Trading Programs in the US, August 1, 2007

4

http://www.westernclimateinitiative.org/ewebeditpro/items/O104F17390.
PDF

and http://www.westernclimateinitiative.org/ewebeditpro/items/O104F18808.PDF

5

See:
http://www.pewclimate.org/docUploads/LetterToSenators
-
05.30.08.pdf





3



in regulating greenhouse gas emissions. A 25 MWe threshold would cover large downstream
sources of emissions, where significant and cost
-
effective reductions can be achieved.



4.

Program Expansion


El Paso supports WCI’s initial thoughts on s
eparate set asides for new sources and even
playing field for all new sources. The regulations should allow for periodic redistribution
the allowances (including the set aside quota). WCI should base allocations on a measure
of productive output, such as

historic throughput to reward those that have invested in
energy efficiency and emission reductions.


5.

Role of Other Policies


El Paso opposes the utilization of “comparable fiscal measures, such as British Columbia’s
carbon tax, to address transportation
fuels and fuel use by residential and commercial sources.
The WCI should reject further consideration of this concept within WCI partners in the United
States due to legal, technical and policy reasons.


6.

Setting the Regional Cap


El Paso supports settin
g caps three years in advance. This gives those affected by the WCI cap
adequate time to prepare for the start of the program.


7.

Apportionment


El Paso suggests distributing allowances centrally, without apportionment to individual
partners. Allocating allo
wances centrally would result in a more efficient administration
of the program, ensures equity among same
-
industry competitors that may be operating
in different partner states and mitigates the chance for leakage even within WCI partners.
A central alloc
ation method ensures consistent distribution of allowances to covered
facilities allowing a company to develop a long
-
term compliance strategy, and lessens the
difficulties in administering a cap
-
and
-
trade program


8.

Distribution of allowances


8.1

Consistent an
d Flexible Methodology:


The distribution methodology should remain as consistent as possible, and should allow the
partners the minimum feasible flexibility in distributing allowances for reasons cited above.








4


8.2

Allocation of allowances:


A portion of
allowances should be distributed free of charge to covered entities under the
program. As described above, interstate pipelines are regulated by the FERC, which would need
to approve recovery of the cost of the allowance fees in the pipeline’s rates. Such
costs for
allowances would be significant (in some cases they could exceed the entire amount that the
pipelines are currently permitted to transport gas.) Additionally, the FERC approval process
would be long and complicated, and if pipelines were not give
n permission to pass along costs
then they could risk going out of business.
6

To be clear, natural gas pipelines would not receive a
“windfall” from free allocations since freely allocated allowances would not be eligible for
recovery in regulated pipelin
e rates as an item of cost. Free allocations are of vital importance to
certain sectors like the interstate natural gas transmission sector, if WCI plans on regulating them
under the cap.


An auction would increase costs to customers of those industries r
egulated under the cap.
Additionally, there are issues with rate regulation (see above response), primarily for those rate
regulated industries operating across state lines, which is another reason why an auction should
not be used to distribute allowances
.



8.3

Bonus Allowance for carbon capture and geological sequestration (CCS) projects:


El Paso recommends providing bonus allowances for CCS projects. A methodology could be
used, whereby a CCS project that achieves certain emission performance standards fro
m covered
entities, is eligible to receive emission allowances from a bonus allowance account.


8.4

El Paso Supports credits for Early Reductions, Banking and Borrowing:


El Paso supports WCI recognition of early reduction and the importance of banking measur
es as
some of the effective cost containment tools against unfettered increase in allowance prices.
However, we are concerned that the WCI has decided not consider “borrowing” as a vital part of
the cap and trade programs. We urge the WCI to reconsider i
ts decision and include borrowing as
a valid compliance mechanism.


8.5

Compliance period and distribution of allowances:


El Paso supports using a three year compliance period and recommends distributing allowances
three years in advance. This ensures that co
mpanies have sufficient time to develop an effective
compliance strategy. and reduces price volatility.


8.6

Assurances against losses due to regulatory uncertainty:





6

See addition
al comments submitted by El Paso to WCI and the California Public Utilities Commission (CPUC) for discussion of this issue


http://www.westernclimateinitiative.org/ewebeditpro/items/O104F14463.pdf, and http://docs.cpuc.ca.gov/efile/CM/76577.pdf.




5

WCI envisions a cap
-
and
-
trade program effective January 1, 2012. The expected market size
of
the WCI is around one billion tonnes. It is widely expected that there will be a national level



economy wide legislation by 2012 covering much of the same sources covered by the WCI. The
proposed WCI programs will require affected companies to init
iate rapid and very large
investments.


In some cases, this process must begin before the regulations have been completely
implemented in order to meet the projected deadlines.


In addition, there is a high likelihood of
change or overturning of the regula
tion due to state legislative action or lawsuits.


It is also
possible that the state laws will be pre
-
empted or superseded by federal legislative action.


The
WCI states must provide some structure to help affected companies avoid large financial losses
d
ue to legislative or legal actions that supersede or overturn this program.


This is especially true
for rate
-
regulated companies, whose investments must be deemed reasonable and prudent by
regulators.


9.

Offsets,

and Allowances From Other Systems


9.1

Offsets:



We support the inclusion of emission offsets, including offsets from Clean Development
Mechanism (CDM) and Joint Implementation (JI), in any cap
-
and
-
trade program without any
geographic or percentage limits. We recommend the elimination of the 10% lim
it outlined in the
July 23, 2008 WCI draft design document.


9.2

Offset Advisory Committee:


El Paso supports the creation of an offset technical advisory committee similar to the Advisory
Committee to The Climate Registry (TCR). Such an advisory committee,

comprising of
governmental, non governmental, regulated sectors and other experienced offset developers could
assist the WCI partners in developing a robust offset program by utilizing functional and/or
project development expertise of such entities.


9.3

A
llowances from other systems:


El Paso supports the WCI recommendation on the use of emission allowances from other
mandatory regulatory programs. El Paso believes that Regional Greenhouse Gas Initiative
(RGGI) credits and possibly allowances from the Mi
dwestern Initiative should be allowed if these
programs are compatible with WCI. Again, this would help lessen compliance costs in the states
participating in regional initiatives, and would assist in transition to an eventual national program.



10.

Reporting



El Paso has submitted concurrent comments to the WCI on the “Draft Essential Requirements of
Mandatory Reporting for the Western Climate Initiative” (Draft report) issued by the WCI
Reporting sub
-
committee on July 23, 2008. We support a
single, consist
ent national framework
for reporting emissions and recommend the WCI to
merge

its reporting program with the US



6

EPA as it finalizes under the Congressional mandate in 2009.




11

Compliance and Enforcement


11.1

Technical/compliance assistance:


El Paso supports
WCI’s offer to provide appropriate technical and other compliance assistance to
the program participants.


11.2

Liability waiver for use of best available data/protocol:


As indicated in previous El Paso comments and acknowledged by many WCI partners, emiss
ion
estimates from natural gas systems (production, processing, transport/storage and distribution)
have a high degree of uncertainty
7
. The integrity of a cap
-
and
-
trade program is dependent on
several factors including measurements of emissions with suffi
cient accuracy and consistency. It
is important for WCI partners to acknowledge the fact that by including fugitive sources from the
gas sector, one is incorporating high degree of uncertainty in the cap and trade program. If the
WCI continues to insist t
o regulate fugitive emissions from the gas sector, the industry should be
provided appropriate liability waiver from retro
-
active compliance demonstration, if in the future
there are improvements in the emission factors employed for the industry. Such prot
ection should
be incorporated into regulation and provides protection for companies who employed the WCI
approved estimation protocols against any historical variation in emissions reports or compliance
demonstration via the cap and trade markets.


Our com
mitment related to environmental issues carries out our core value of Stewardship as we
always strive to be good stewards of the environment and within our communities. We offer
these additional comments for your consideration and look forward to working
with you on
making the general reporting program a success. We hope you find these comments useful in
your important work. As
WCI

deliberates the contours and content of a world
-
class cap
-
and
-
trade
reporting program in the WCI region, please feel free to c
ontact me at (713) 420
-
7913 or
fiji.george@elpaso.com
, with questions or for further information or clarification.



Sincerely,


Fiji George



Manager, Corporate Development




7

http://
www.ipieca.org/activities/climate_change/downloads/workshops/jan_07/5%20George.pdf




7

El Paso Corporation




Attachment 1:

El Paso’s GHG Leadership Credentials

Att
achment 2:

El Paso Comments on the California Air Resources Board Regulation for
Mandatory Reporting of Greenhouse Gas Emissions





1

ATTACHMENT 1

EL PASO’S GHG LEADERSHIP CREDENTIALS




El Paso is sponsoring the Ruby pipeline
8

project to provide increased acce
ss to abundant
Rocky Mountain gas to California. Ruby is the first major interstate pipeline to incorporate
GHG mitigation measures in its construction and design, with a goal of offsetting 100% of its
carbon footprint.




El Paso has been a member of the C
alifornia Climate Action Registry (CCAR) since 2006. In
June 2007, El Paso became the first natural gas transmission company to file an emissions
inventory covering all applicable GHGs, including methane, N
2
O and CO
2
.

On July 16
th

of
2007 El Paso became
the first natural gas company to certify its emissions and earn the status
of Climate Action Leader. We were also the first CCAR member

to report and certify an
emissions inventory

for 2006.
9

On December 31, 2007, El Paso registered its 2006 GHG
emission

estimates under DOE 1605(b) requirements.




El Paso is a member of The Climate Registry’s (TCR) Advisory Committee.
10

As such, El
Paso provides input on technical elements associated with TCR’s design and implementation,
and feedback on broader policy issu
es that could affect the organization’s support of state and
provincial climate programs.




El Paso has participated and reported into the Carbon Disclosure Project (CDP) V and VI. In
June 2008, El Paso released its first Corporate Social Responsibility (C
SR) report
11
.




El Paso is part of the Natural Gas Protocol Workgroup facilitated by the CCAR and the
World Resources Institute (WRI), with the goal to produce a guidance document and protocol
for estimating GHG emissions from natural gas transmission, stora
ge and distribution sectors.
The protocol and calculation tool(s), to be developed through a stakeholder workgroup
process, will supplement the CCAR’s General Reporting Protocol
12

and the WRI/World
Business Council for Sustainable Development Greenhouse Ga
s Protocol
-

A Corporate
Reporting and Accounting Standard.
13




The El Paso Pipeline Group’s GHG emission reductions from participation in the EPA
Natural Gas Star Program total over 55 billion cubic feet, or approximately 20 million tons of



8

http://www.rubypipeline.com/

9

El Paso’s 2006

entity
-
level emissions report

is

available at
http://www.climateregistry.org/CARROT/public/reports.aspx
.


10

El Paso was nominated for this position by California Environmental Protection Agency

11

http://elpaso.com/CSR/index.html

12

http://www.climateregistry.org/docs/PROTOCOLS/GRP%20V2
-
March2007_web.pdf

13

http://www.ghgprotocol.org/templates/GHG5/layout.asp?type=p&MenuId=ODg4&doOpen=1&ClickMenu=No.






2

CO
2
e, since 1993
. These and many other internal initiatives within El Paso have ensured that
the El Paso Pipeline Group’s lost and unaccounted for (LAUF) gas was less than 0.15% for
2006.




El Paso is part of the Coalition for Emission Reduction Projects (CERP), which aims

to
educate policy
-
makers about the key role that offsets can play in a U.S. cap
-
and
-
trade
program. The CERP is a unique group, which brings together leading companies in the
energy, financial and offset provider sectors.




El Paso maintains leadership po
sitions in the Interstate Natural Gas Association of America
(INGAA) on GHG and in the development of the INGAA Greenhouse Gas Emissions
Estimation Guideline for Natural Gas Transmission and Storage.




El Paso is part of the LNG Protocol Workgroup facilita
ted by the Cleaner Fossil Energy Task
Force of the Asia Pacific Partnership and led by the American Petroleum Institute.




El Paso was recognized for its technical, regulatory and policy leadership on GHG issues by
Southern Gas Association (SGA) and became
a recipient of SGA’s 2007 Environmental
Stewardship Excellence Award.




3


ATTACHMENT 2

El Paso Corporation
’s Comments
on the Western Climate Initiative (WCI) Draft Design of
the Regional Cap
-
and
-
Trade Program (July 23, 2008)


El Paso Corporation is the large
st natural gas pipeline company in North America and one of the
top ten independent exploration and production companies in the United States. We are also
recognized leaders in the area of GHG issues for our sector and are members of the California
Climat
e Action Registry (CCAR). Two of our subsidiaries are The Climate Registry (TCR)
“Founding Reporters”.


El Paso appreciates the opportunity to comment on the
Draft Design of the Regional Cap
-
and
Trade Program issued by the WCI on July 23, 2008.
Our comme
nts are detailed below:



1.

Scope of the WCI program:


1.1

General Regulatory Framework:


El Paso

operates in over 20 states in the United States

and therefore

it is highly important to have
a consistent regulatory framework. El Paso acknowledges the leadership
demonstrated by the
WCI and several other states in formulating
market
-
based responses to climate change. We
respect the sovereign rights of each state, however in the interest of achieving the most efficient
response to the challenges of climate change, i
t is critical that WCI and the other states adopt or
incorporate a “sunset” provision to merge into a future national program.



El Paso believes that WCI should design a program that is as consistent as possible with the
federal proposal that is most like
ly to be adopted in the future. This means that WCI should
carefully review current legislative proposals, and
conform
the WCI program as closely as
possible
to

the
legislative provisions that are most likely to be approved. If a “sunset” provision is
not
adopted, regulations that implement WCI should contain measures that allow for the revision
of such regulations to ensure consistency with a federal program. There should also be a
provision in any WCI allocation regulation that calls for a review and allo
ws for possible revision
of the program according to specified timeframes.

A recent research conducted by Point Carbon
14

supports our assertion related to efficiencies of the carbon market and a single national, consistent
cap and trade program. This rese
arch by Point Carbon concludes that “that regulators strive to
find an agreement on a common program for the entire country, lest excess goodwill undermine
the original purpose of cap
-
and
-
trade: reducing carbon emissions at the lowest cost.” The paper
als
o finds that there
is limited environmental benefit

to be gained

from leaving the field open to
multiple carbon markets with complex rules.

If multiple markets co
-
exist in parallel, regulators
should consider linking them to lower overall emission abatem
ent costs.





14

Pre
emptive Strike: The Future of Regional Trading Programs in the US, August 1, 2007




4


1.2

Regulation of Natural Gas Sectors:


T
he draft recommendations
15

of the WCI are inconsistent with recommendations of the
California Public Utilities Commission (CPUC)
and the Pew Center on Global Climate
Change

(Pew)
16

with respect to regulating
the natural gas sector. The
WCI

should adopt the
well
-
reasoned position of the CPUC
and the Pew
on this issue
.

The production
/
processing
sectors
and the gas fired industrial combustion sources below the applicability thresholds
should not be included in
either the California cap
-
and
-
trade program or the WCI cap
-
and
-
trade programs as covered sectors. This is mainly since the integrity of a cap
-
and
-
trade
program is dependent on several factors, including measurement of emissions with sufficient
accuracy an
d consistency.


In its March 3, 2008 Draft recommendations, the WCI scoping committee acknowledges the
complexities associated with the oil and gas production sector. WCI states that the “oil and
gas production facilities include a diverse set of equipm
ent, processes, and activities. These
facilities may also cover large geographic areas, encompassing well fields, pipelines, and tank
batteries. Ownership and operational control may be divided among multiple entities as the oil
and gas is produced and pro
cessed”.


In the electric sector, over 90% of the emissions are measured accurately utilizing continuous
emissions monitoring systems (CEMS). Combustion related emissions from other larger
sources can be estimated with sufficient accuracy based on stochi
ometric fuel consumption
17
.
Emissions from these sources consist mostly of CO
2
. We acknowledge and accept that
combustion sources above a 25,000 tonnes of
CO
2

per year threshold may be covered under
the cap
(including sources within our sector)
since fuel
measurement techniques at a facility
level can yield a fair representation of the
CO
2

emissions


Previously
18
, i
n exempting the agriculture and forest and land use sectors, the WCI
reasoned
that “emissions cannot be calculated or measured precisely and cos
t
-
effectively” for inclusion
in a cap
-
and
-
trade program. This statement is also very true for the natural gas sector, which
faces similar issues with
methane
-
related emissions that account for approximately 35% of the
emissions profile. Further,
t
he indu
stry has contributed to significant reduction in national
methane emission levels through participation in the EPA Natural Gas Star program.


Under a cap and trade program each source must retire allowances equal to their total actual
emissions. Therefore
, each owner/operator must be able to accurately measure its
total
emissions from each source so that allowances can be retired over time to cover the total



15

http://www.westernclimateinitiative.org/ewebeditpro/items/O104F17390.PDF

and htt
p://www.westernclimateinitiative.org/ewebeditpro/items/O104F18808.PDF

16

See:
http://www.pewclimate.org/docUploads/LetterToSenators
-
05.30.08.pdf


17

For the natural gas secto
r, this equates to about 0.058 tonne of CO2 for every 1,000 cubic feet of natural gas processed and about 19 pounds of CO2 fo
r every
gallon of natural gas liquids.

18

March 3, 2008 Draft Program Scope Recommendations, page 16, http://www.westernclimateiniti
ative.org/ewebeditpro/items/O104F16031.PDF

.




5

emissions. Accurate measurement of emissions is critical, because each source of emissions is
assoc
iated with a tradable allowance. As explained below, accurate measurement of the
total
entity wide

fugitive emissions from the natural gas sector for employment in a cap
-
and
-
trade
program is not possible at this time.


Currently, El Paso and other natura
l gas companies estimate their fugitive emissions using
factors developed in the early ‘90s by the Gas Research Institute (GRI) and the USEPA.
There is a high degree of uncertainty
19

associated with these factors since these factors were
derived from a lim
ited data. In addition they may no longer be representative of current
operations. GRI/EPA study was conducted for the purpose of national inventory development
but unfortunately, due to lack of better data, we and others continue to use these factors.
The
GRI/EPA study was not intended to be incorporated into a cap
-
and
-
trade program. Further, in
a cap and trade program, an allowance is generally defined as a permit to emit one ton or tonne
of emissions that can be traded within a market based mechanism

such as cap
-
and
-
trade.
While caps are developed with gross estimates on a regional, state or national level,
compliance through retirement of emission allowances has to be demonstrated at a source or
facility level.
Inclusion of emission sources in the
gas sector with high degree of emission
uncertainties with other emission sources where the
CO
2

can be reliably measured (e.g.
power plants) or estimated will impact the integrity of the cap
-
and
-
trade program.


We believe that the
WCI scoping committee w
as on the “right track” in its March
recommendations where it is stated that “[b]ased on the information reviewed to date, only a
portion of the sources at oil and gas production and processing facilities will likely be feasible
to include in a cap
-
and
-
tra
de program at this time. Improved methodologies may enable
additional sources to be included in the future”.


As explained earlier, El Paso is part of the California Climate Action Registry (CCAR) expert
stakeholder group reviewing the development of an a
ppropriate protocol for the natural gas
transmission and distribution sectors. While this group is attempting to develop an emissions
estimation protocol for entity wide emissions reporting, it by no means is developing a
protocol that can be employed in
a cap
-
and
-
trade program. The group is merely compiling
existing emission factors and best practices to develop standardized emission calculation
methodologies (i.e. formulas). It does not improve the activity data or the emission factors to
overcome the

uncertainty issues for use in a cap and trade program. The emission factor and
activity data improvement efforts will require significant resources and this task is best done at
a national level.
Therefore, including the methane related fugitive and pro
cess emissions
from the natural gas sector for reporting and in the cap and trade program, even under the
second phase of the program, is pre
-
mature at this time.


Finally, if the WCI decides to incorporate fugitive emissions from the natural gas sector i
nto
the cap
-
and
-
trade program, the WCI should adopt effective regulations that incorporate
principles such as “no look back”, where by a company that employed an acceptable protocol



19

http://www.ipieca.org/activities/climate_change/downloads/workshops/jan_07/5%20George.pdf




6

for estimation emissions and demonstrated compliance via appropriate WCI c
ap
-
and
-
trade
procedures in a particular time period is shielded from future compliance obligation or
enforcement actions, if better emissions estimates or technology for measuring emissions are
developed.
We therefore urge the WCI to consider not includi
ng fugitive emissions in the
reporting and the cap and trade program under WCI.




2

Point of Regulation


El Paso supports
WCI
’s

decision on the downstream concept whereby i
ndustrial sources (both
process and combustion) with emissions above
a certain emissi
ons threshold
are

regulated at the
point of emissions.


However, we do not support the
“upstream” regulation

for
r
esidential, commercial,
and

industrial
fuel combustion at facilities with

emissions below the
applicability
threshold

by regulating the
enti
ty w
here the fuels enter commerce in the WCI

Partner jurisdictions
. We understand that the
point of regulation for
these sources
is
still undefined and “
may vary by jurisdiction

.

As stated
above,
El Paso supports the recommendations of the CPUC and the
Pew
center
with respect to the
regulation of the residential and commercial sectors, and recommends
their
adoption by the WCI.


Extending regulation to industrial sources below the threshold may extend the theoretical reach of
the program. However from
a practical stand point, including these small sources within the cap
and trade program

will increase
the administrative and compliance costs of the program with
marginal benefits to the environment.
It puts the compliance burden on select sectors of the
gas
economy for the purchase of emission allowances, without regard to actual existing regulatory or
contractual limitation considerations.


We urge the WCI to consider cost
-
effective and practical design structures

and avoid
consideration of any fuel prox
y
“upstream”
cap and trade methods
.


3

Thresholds

for coverage under the cap
-
and
-
trade pr
o
gram


El Paso recommends using a 25 MWe threshold instead of the 25,000 tonnes per year of CO
2e
for
the large industrial and electrical combustion
sources.
This thres
hold is the same as under the
Regional Greenhouse Gas Initiative (
RGGI
)

model rule and is the same threshold used under the
Acid Rain program. Additionally, WCI partners such as Oregon
20

and New Mexico
21

have
suggested using this threshold in regulating gree
nhouse gas emissions. A 25 MWe threshold
would cover large downstream sources of emissions, where significant and cost
-
effective
reductions can be achieved. Additionally, designing a program that is compatible with other



20

Oregon Carbon Allocation Task Force, January 12, 2006, http://www.oregon.gov/ENERGY/GBLWRM/docs/TF_Minutes
-
01
-
12
-
06.p
df.

21

New Mexico, Greenhouse Gas Reporting Power Plant Subgroup Meeting, May 24, 2007,http://www.nmenv.state.nm.us/aqb/GHG/Docs/Pow
erplant_breakout_05
-
24
-
07.pdf.




7

regional initiatives is important s
ince allowance trading between both regions would be possible,
and this would in
-
turn help keep compliance costs down.


If
the 25 MWe threshold is not acceptable and the
WCI does decide to regulate
the natural gas
sector, then El Paso advocates
establishi
ng the applicability to the program based on combustion
of
CO
2

and not
to
include

emissions from fugitive and vented sources due to the uncertainties
associated with the quality of the emission factors and the activity data as explained in the earlier
sect
ion. Therefore, we recommend
using a threshold of 25,000 tons of CO
2

instead of the

WCI
proposed threshold of

25,000 tonnes per year of CO
2e
.
California as part of the mandatory
reporting regulatory development for AB 32 concluded that a threshold of 25,0
00 tonnes per year
of CO
2

is an appropriate threshold for regulating stationary combustion sources.
This threshold
accounts for 94% of industrial and commercial point source emissions in California. After
careful review,
California

chose to use this thre
shold and not employ the carbon dioxide
equivalent
22

(CO
2e
) as the applicability threshold.
California

did not include the process and
fugitive emissions in the industrial sectors, mainly due to uncertainty with the emission estimates
and lack of technical
protocols.
U
sing different metrices for cap and trade applicability within the
WCI jurisdiction will only add to
the
confusion
for
affected facilities and could impact the
eventual cap and trade markets. Therefore,
to maintain the integrity of the cap an
d trade program
and to ensure consistency with the AB32 regulations in California,
the WCI

should ensure that
the 25,000 tonnes per year of CO
2

(and not CO
2
e) threshold be
used
and maintained
as the
applicability threshold for

the

cap
-
and
-
trade program.


4.
Program Expansion


El Paso supports WCI’s initial thoughts on
separate
set asides for new sources and even playing
field for all new sources.

The regulations should allow for the allowance distribution system
(including the set aside quota) to be revi
sited and revised in the future to accommodate new
sources or release or re
-
allocation of any unused new source set asides back to the compliance
market. Allowances need to be periodically redistributed based on
the
most current data. A
periodic redistribu
tion ensures that new facilities can get an allowance allocation, and prevents
facilities that shut down
or reduces operations
from receiving the same allocation forever.


WCI should base allocations on a measure of productive output, such as historic thr
oughput to
reward those that have invested in energy efficiency and emission reductions.


5.
Role of Other Policies


5.1
. Carbon Tax and Other Fiscal Measures:


El Paso opposes the
utilization of “comparable fiscal measures, such as British Columbia’s
carb
on tax, to address transportation fuels and fuel use by resi
dential and commercial sources.



22

Per AB 32 §38505(c), "Carbon dioxide equivalent" means the amount of carbon dioxide by we
ight that would produce the same global warming impact as a given
weight of another greenhouse gas, based on the best available science, including from the Intergovernmental Panel on Climate
Change.




8

Our comments focus on the issue of a carbon tax on interstate natural gas pipelines and
processing plants. If interstate pipelines are held legally responsible to

pay significant carbon
fees/taxes for the CO
2

potential of their gas throughput into WCI member states, they would be
forced to mount legal challenges to such the state regulations. The resolution of those challenges
could take years. And even if the WCI
position ultimately prevailed, the adverse impact of such
carbon fees/taxes on consumers in the WCI member states would be very large.
The
WCI

should
reject further consideration of this concept due to legal, technical and policy reasons:


1.

Technical and

Policy:


a.

The
WCI

should focus on regulating sectors that can provide the greatest emission
reductions, most reliably, at the lowest cost.
WCI partners

should not support the use of a
proxy method for actual emissions (whereby the cap is defined in terms
of the carbon content
of the fuel and allows a cap to be placed upstream on fuel producers and transporters) nor a
carbon tax policy that does not provide any assurance as to compliance with
the WCI
regulatory
goals.


b.

The theory that upstream natural gas e
ntities could attach billions of dollars of allowance cost
to their cost of business and transmit the price signal through the economy is flawed unless
explicit regulatory provisions are included to allow “pass through” of all costs and taxes.


c.

N
atural gas

demand
, especially in the residential/commercial sectors,

is relatively inelastic.
Thus, carbon fees are unlikely to have significant effect on gas
-
related emissions in the
residential/commercial sectors.


d.

Assuming that pipelines are able to pass
-
throug
h of the carbon taxes or allowances, adding a
carbon tax on interstate pipelines with facilities already subject to the cap
-
and
-
trade program
would likely result in significant increase in natural gas price within the WCI states. In and in
some cases, this

would result in an increase of over 50% in of the current pricing for
deliveries of natural gas carried by the interstate pipelines into WCI member states (such as

California), while producing very little reduction in emissions.


e.

In our opinion, an additi
onal carbon fee or tax structure, operating in conjunction with a cap
-
and
-
trade program, would significantly hurt natural gas consumers and also have tremendous
negative impacts on the WCI member states economies, with little benefit.


f.

There has been no pr
actical application of an upstream emission fee/tax scheme in the US. A
recent paper
23

explored the practical effectiveness of a carbon tax in Scandinavia, and
concluded
that
the availability of “product” substitution is a dominant factor in achieving
redu
ctions. Due to lack of immediate substitution of natural gas and demand inelasticity, it is
very conceivable that the imposition of such carbon fees/taxes would potentially raise energy
prices in the
WCI member states

without tangible environmental benefi
ts.




23

Taxation as a Regulatory Tool: Lessons from Environment
al Taxes in Europe, Monica Prasad, Northwestern University, March 2008.




9



2.

Interstate Commerce Legal Issues:


a.

Several states like California have

limited authority to impose administrative fees:


The imposition of carbon “fees” or taxes appear to go well beyond funding the administrative
costs associated with implement
ing regulations like AB 32. For example, t
he scope of
the
California Air Resource Board’s (
CARB’s
)

authority to levy fees under AB 32 is specified in
Health and Safety Code Section 38597. The
analyses
for the
California
Assembly and Senate
both describe t
his fee provision as providing authorization to CARB, “to adopt a schedule of fees
to pay for the costs of implementing the program

established pursuant to the bill’s provisions.”
24

In other words, CARB’s fee authority under AB 32 is limited to funding the

administrative
functions of implementing AB 32. The
refore
,

any carbon tax program within the WCI US
partners that may be

used as a

tool to incent emission reductions by affecting the relative prices
within the economy
” would go

well beyond
legal authori
ties
authorized
by
at least some state
legislatures.


b.
WCI

member state
cannot adopt “fees” or taxes that will violate the Commerce Clause:


A

proposed carbon “fee” or levy on pipelines delivering natural gas into
the
WCI partner

s
tates
, if
adopted, wo
uld run afoul of the dormant Commerce Clause and would be actionable as such.


See
Dennis v. Higgins
, 498 U.S. 439 (1991) (holding that dormant Commerce Clause suits against
states may be brought under the Civil Rights Act of 1871, 42 U.S.C. § 1983).



Int
erstate gas pipelines are regulated by the Federal Energy Regulatory Commission (FERC).


First, an interstate pipeline does not have a substantial nexus to any specific state and certainly no
“substantial nexus” to a state in which they deliver gas.


Secon
d, the proposed tax would bear no
relationship to a pipeline’s investment within the state, but merely to the amount of carbon
transported through or to the state. Third, the proposed tax discriminates against interstate carriers
if it only applies to inte
rstate pipelines.


Fourth, the proposed “fee” would not be related to any
services provided by the state.


The Constitution simply does not permit local interests to unduly
burden interstate commerce.


c.
Even if the C
ommerce Clause

issue

is overcome, an
y
proposal on
carbon

taxes will need
significant revisions requiring FERC approval, and could result in an unintended shift of natural
gas to other states without carbon constraints


Any attempt by the WCI U
.
S
.

partners to

regulate GHGs from the natural g
as sector at the
interstate pipeline level would cause regulatory complications that, at best, will slow the
implementation of and limit the effectiveness of the program. The FERC would need to



24

California Air Resources Board. “Climate Change Draft Scoping Plan: a framework for change.” 2008.
http://www.arb.ca.gov/cc/scopingplan/document/draftscopingplan.pdf
.





10

accommodate cost recovery and pass
-
through of the carbon fees
. At the same time, the interstate
pipeline business is generally very competitive, and pipelines cannot simply increase their rates
without risking losing business to competitors.


If interstate pipelines become legally responsible to pay a significant
carbon fees/tax for the CO
2

potential of their gas throughput, they would be forced to mount legal challenges to the state
regulations. The resolution of those challenges could take years, and the pipelines would seek
recovery of those costs in their rates
. The inability of interstate pipelines to obtain rate recovery
could threaten the financial viability of the pipelines. Conversely, even if the pipelines
successfully obtained rate recovery there would be a disincentive for shippers to select that state’s

delivery points for their gas. This outcome, or even the risk of such an outcome, could further
result in pipeline companies choosing not to develop new pipeline capacity to the regulating state
and instead spend their capital developing projects in othe
r regions.


6.
Setting the Regional Cap


El Paso s
upport
s

setting caps three years in advance
. This
gives those affected by the WCI cap

adequate time to prepare for the start of the program.
E
ntities affected by the program need

sufficient

time
understand

the regulations and develop a compliance strategy that will ensure a
smooth transition once the cap begins in 2012.
In particular, it takes time to invest in, develop and
implement the many new technologies that will be required to achieve aggressive GHG
r
eductions. A too rapid time schedule could result in high prices and volatility that could produce
a backlash against the regulation. A gradual implementation will allow the application of new
technology and a more cost
-
effective and less disruptive achi
evement of the goals.


7.
Apportionment


El Paso suggests distributing allowances centrally, without apportionment to individual partners.
Allocating allowances centrally would be much easier from an administrative standpoint, and a
consistent, central met
hod lessens any potential for dispute between partner states. As mentioned
by WCI, another benefit of a central methodology is that it ensures equity among same
-
industry
competitors that may be operating in different partner states. The issues of “intersta
te commerce”
and “leakage”
25

are important factors that need careful analysis as states/regions develop their
cap
-
and
-
trade programs. El Paso believes that the issue of leakage is best addressed through a
consistent, national program instead of individual r
egional actions. At
the
regional level, the
further allocation programs diverge from
a
consistent, central allocation mechanism, the greater
the chances for increase in leakage within WCI partners.





25

The term “l
eakage


refers to
existing direct and indirect emissions
relocating outside the
carbon constrained
region in
response to an

associated compliance costs with the mandatory
GH
G regulations
.
The potential for leakage is higher at a state or regional level, though potential
for leakage exists under a national program to other less or no carbon constrained nations




11

A central allocation method ensures consistent distribut
ion of allowances to covered facilities
allowing a company to develop a long
-
term compliance strategy, and lessens the difficulties in
administering a cap
-
and
-
trade program. This approach has been very successfully applied in the
national SO
2

program and h
as been much simpler and more transparent than the state
-
by
-
state
approach taken by other regional programs such as the SIP call.


8. DISTRIBUTION OF ALLOWANCES


8.1

Consistent and Flexible Methodology:


The distribution methodology should remain as cons
istent as possible, and should allow the
partners the minimum feasible flexibility in distributing allowances. As stated earlier, it will
greatly disadvantage certain companies if inconsistent distribution methods are
used

and it will
prove costly to estab
lish a regional body or require an existing authority to oversee differing
allocation plans. It will also create inequities between states if some states allocate allowances for
free while others auction all their allowances.


Regulated sectors already wil
l have to face a number of competitive and differentiated issues
related to meeting their compliance obligations. Therefore equity among same
-
industry
competitors regulated under the cap, and consistency among sectors throughout the region is very
importan
t. This could also potentially minimize leakage within WCI.



8.2

Allocation of allowances:


A portion of allowances should be distributed free of charge to covered entities under the
program.
As described above, interstate pipelines are regulated by the
FERC, which would need
to approve recovery of the cost of the allowance fees in the pipeline’s rates. Such costs for
allowances would be significant (in some cases they could exceed the entire amount that the
pipelines are currently permitted to transport
gas.) Additionally, the FERC approval process
would be long and complicated, and if pipelines were not given permission to pass along costs
then they could risk going out of business.
26

To be clear, natural gas pipelines would not receive
a “windfall” from

free allocations since freely allocated allowances would not be eligible for
recovery in regulated pipeline rates as an item of cost. Free allocations are of vital importance to
certain sectors like the interstate natural gas transmission sector, if WCI p
lans on regulating them
under the cap.


An auction would increase costs to customers of those industries regulated under the cap.
Additionally, there are issues with rate regulation (see above response), primarily for those rate
regulated industries opera
ting across state lines, which is another reason why an auction should
not be used to distribute allowances.




26

See additional comments submitted by El Paso to WCI and the Calif
ornia Public Utilities Commission (CPUC) for discussion of this issue


http://www.westernclimateinitiative.org/ewebeditpro/items/O104F14463.pdf, and http://docs.cpuc.ca.gov/efile/CM/76577.pdf.




12



8.3

Bonus Allowance for carbon capture and geological sequestration (CCS) projects:


El Paso does recommend providing bonus allowances for CCS pr
ojects. A methodology could be
used, whereby a CCS project that achieves certain emission performance standards from covered
entities, is eligible to receive emission allowances from a bonus allowance account. It is
recommended that a bonus allowance rate
be used for distributing allowances under the account,
with earlier projects receiving a larger number of allowances, compared to CCS projects
undertaken later on in the program. This would encourage the
early
development and deployment
of CCS projects and

would help achieve further reductions early on in the program.


8.4

El Paso Supports credits for Early Reductions, Banking and Borrowing:


El Paso supports WCI recognition of early reduction and the importance of banking
measures
as
some of the effective
cost containment tools
against unfettered increase in
allowance prices.

However, we are concerned that the WCI has decided not consider “borrowing” as a vital part of
the cap and trade programs. We urge the WCI to reconsider its decision

and include borr
owing as
a valid compliance mechanism
.


a.

Early Action Credits:


El Paso believes that early actions should be recognized and should be a mandatory design
feature as opposed to be
ing

left t
o

the discretion of the Partner. A certain percentage of WCI
allowanc
es should thus be set
-
aside for recognition of early actions. A specific eligibility date
needs to be set, such as actions taken on or after January 1, 1994
27

will be eligible for offset
credits. Early action credits should be distributed based on a case
-
by
-
case evaluation and after
independent third party verification and also registration with a registry like the California
Climate Action Registry (CCAR).

We urge the WCI to recognize and include early reduction
credits from activities at natural gas facil
ities and other sectors that meet the accepted attributes of
the offset credits. We believe such early action credits from the natural gas sector will aid the
cap
-
and
-
trade programs by providing low cost emission credits to the market. Such early actions

should be rewarded with emission allowances as opposed to “automatic rewards” through
adjustments on the emissions cap or other incentives. Further, providing early action credits will
maintain consistency with other regulatory programs like RGGI, the Cl
ean Development
Mechanism (Kyoto Protocol), EU ETS, etc.


b.

Banking and Borrowing:


B
anking and borrowing

are effective cost containment measures that

provides the regulated entity
from steep escalation in compliance costs especially in the early years due t
o tremendous
uncertainties ranging from baseline estimates to technological uncertainities surrounding control



27

‘‘Lieberman
-
Warner Climate Security Act of 2008’’.
S.3036, Su
btitle B, Section 3201




13

equipment. The WCI should also factor the fact that outside the utility sector, very few
companies in the WCI region have experience in cap
-
and
-
trade systems. A sound banking and
borrowing compliance program provide effective insurance against the potential for steep
increases in compliance and energy costs to the WCI region.



The importance of effective banking/borrowing has been outlined in
many reports.
In a research
paper
28
, it is explained that “
if banking and borrowing of allowances

are allowed, then only the
sum of capped

national emissions over time matters, not the specific

trajectory, because trading of
allowances will

generate the cos
t
-
minimizing trajectory

.

WCI should focus

on the “2020
regional goal” and the
cumulative

reductions through 2020 as opposed to a specific year or a
specific compliance period.


In fact, the lack of a robust banking provision in the RECLAIM program has
been cited as a

contributing factor to the suspension of the RECLAIM program
29
. Banking and borrowing reduce
the compliance costs and price volatility and introduce flexibility in corporate strategies with
respect to technology deployment, capital turnover,

asset optimization and the vagaries of the
weather and force majeure situations. The latter is extremely important in the natural gas sector,
as we strongly believe that natural gas is the “bridge” solution to a lower carbon intensive fuel
economy.


While

it is debated that the risks associated with “borrowing” lies with the potential delay in
actual emission reductions or in some cases if the emission source can not “repay” borrowed
allowances and thereby impacting the integrity of the cap.
However, if s
trong regulatory
measures as outlined in the recent Lieberman
-
Warner bill
30

are established
in the WCI model rule
to ensure “borrowed” emissions are re
-
paid back, borrowing provides an effective cost
containment measure, especially in the absence of a “safe
ty valve” or a price cap.

Hence, it is
important to note that banking/borrowing have limited impact on the distribution of allowances,
however they are important tools to mitigate price volatility and provide long term price signals


8.5

Compliance period

and distribution of allowances:


El Paso s
upport
s

using a three

year compliance period and recommend
s

distrib
uting allowances
three years in advance. This ensures that companies have

sufficient

time to develop an effective
compliance strategy. A three yea
r compliance
period
reduces price volatility by allowing the
prices to be averaged over the multi
-
year period. Several allowance trading programs have
experienced very high prices during their early periods due to market uncertainty. Establishing a
three

year compliance period provides affected companies with a longer period to gain



28

A U.S. Cap
-
and
-
Trade System to Address Global Climate Change, Robert Stavins, Havard University, October 2007


29

Economics Pollution Trading for SO2 and NOx, Resources For Future, Dallas Burtraw, David A. Evans, Alan Krupnick, Kare
n Palmer, and Russell Toth, March 2005,

30

S. 3036, Subtitle C




14

confidence in the market and avoid being forced to purchase allowances during the early, volatile
period in the program.



8.6


Assurances against losses due to regulatory un
certainty


WCI envisions a cap
-
and
-
trade program effective January 1, 2012. The expected market size of
the WCI is around one billion tonnes. It is widely expected that there will be a national level
economy wide legislation by 2012 covering much of the
same sources covered by the WCI.
Depending on the scope of the final WCI program and eventual approval by the legislatures in the
individual states, companies would have to initiate rapid and very large investments.


In some
cases, this process must begin

before the regulations have been completely implemented in order
to meet the projected deadlines

considering the long lead time involved in some of the
compliance strategies


In addition, there is a high likelihood of change or overturning of the regulati
on due to state
legislative action or lawsuits.


It is also possible that the state laws will be pre
-
empted or
superseded by federal legislative action.


The WCI states must provide some structure to help
affected companies avoid large financial losses due

to legislative or legal actions that supersede
or overturn this program.


This is especially true for rate
-
regulated companies, whose investments
must be deemed reasonable and prudent by regulators


The recent Court decision overturning the EPA Clean Air
Interstate Rule (CAIR) has created
huge financial losses and/or risks for companies
31

that have invested billions of dollars for
pollution control equipment and emission allowances on the assumption that the rule would
become effective.


The more proactive
companies were in preparing for CAIR, the greater the
risks and losses they now face
32
.


Regulated utilities who invested in pollution control equipment
now risk having those costs disallowed from their rates if there is not regulatory requirement for
the p
lanned reductions.


This exact outcome occurred under the original OTR NO
x

Budget
Program, when Public Service of New Hampshire of New Hampshire was an early installer of
pollution control equipment.


When the rules were delayed due to court action, the st
ate utility
commission disallowed the investment.


The regulatory risk to companies affected under the WCI will be even larger.


These risks will
slow efforts to proactively and efficiently comply with the program.


The WCI states should
develop a program
protect the affected companies from such outcomes in order to allow the
efficient and lowest cost application of the program.
Such
provisions
would protect companies
who have undertaken reasonable compliance efforts in response to state approved WCI model
rule.
In addition, as outlined in Section 1.1
, effective

sunset provisions
or “
off ramp”
to

transition



31

PPL Corporation (PPL),

Form 8
-
K filed with the Securities and Exchange Commission, July 11, 2008. PPL advised approximately $100
million impairment charges related to emissions after a recent

court ruling invalidated the CAIR.


See also Exelon Corporation, Form 10
-
Q, July 23, 2008

32

Testimony of Brian Mclean, USEPA, Before the Committee on Environment and Public Works, Subcommittee on Clean Air and
Nuclear Safety, United States Senate, July 2
9, 2008. Page 14.




15

in
to a national
program must be incorporated in such a manner that reductions (and investments)
made by companies in the WCI are credited in the nationa
l program
.


9.
Offsets,

and Allowances From Other Systems


9.1

Offsets:



We support the inclusion of emission offsets, including offsets from Clean Development
Mechanism (CDM) and Joint Implementation (JI) in any cap
-
and
-
trade program. Offsets are an
ex
cellent means of achieving GHG reductions from sources not easily covered under a cap
-
and
-
trade program due to difficulties in accurately measuring their emissions (i.e., fugitive methane
emissions from natural gas
systems
). Additionally, offsets are an im
portant means of keeping
compliance costs down, and give covered entities the time necessary to develop and deploy new
technologies to mitigate other sources of emissions.


El Paso advocates allowing for offsets, and suggests adoption of the following regu
latory
structure in the WCI offset program:


1.

Geographic limits should not apply as long as offsets meet rigorous standards for
environmental integrity.

2.

Percentage limits on the use of offsets are unnecessary and the 10% limit outlined in
the July 23
, 2008 WCI d
raft design document should
be eliminated.

3.

Early offset or reduction credits should be distributed to projects that meet well
-
defined standards.

4.

WCI should develop a list of offset projects that are eligible for a streamlined review
pro
cess.

5.

Offset projects should not have to undergo a full re
-
evaluation on an annual basis; a
limited multi
-
year crediting period should be used instead.

6.

A consistent timeframe for offset eligibility should be set. El Paso recommends
eligibility per
iods of 10
-
20 years. This will give offset developers assurance that they
will be able to receive offset credits for a specified and fairly long duration of time,
as long as the integrity of the project and other criteria are maintained.


a.

Geographic Limits

on the Use of Offsets:


Arbitrary geographic limitations should not be applied as long as offset projects meet rigorous
standards set by WCI. Projects should be allowed from the rest of North America and
internationally. El Paso recommends allowing offset
s eligible under the current Kyoto Protocol
guidelines


Clean Development Mechanism (CDM) and Certified Emission Reduction (CER)
credits, in addition to other potential offset credits. We recommend this approach due to the
reasons outlined below:




Reduce
d compliance costs to
WCI
consumers
-

a viable means of keeping
compliance costs down, such as extending the geographic scope of offsets, should be



16

pursued. If linked,
the

WCI must consider that the extension of offset eligibility to only
industrialized co
untries will increase costs and will shift emissions
-
generating activities
to countries that do not have national limits. Allowing the use of emission reduction and
sequestration projects globally will help keep program costs down and create new
incentives

to provide offset projects in countries without a reduction program.




Leadership
-

This approach will allow
WCI partners
to engage with the world on
the issue of climate change and regain its leadership status on international climate
policy.




“Green
-
Te
ch” Transfer
-

As
WCI partner states
molds itself into the “green tech” hub
of the world, engaging in the development of robust international offsets will accelerate
and incentivize the pace of the necessary technology to address climate change on a large
scale. By providing a means of transferring U.S. clean energy technologies and expertise
to the developing world, it will open a bridge of cooperation with key developing
countries around the issue of climate change and technologies.




Finally, as recogniz
ed by the WCI with respect to CDM offsets from developing
countries can be employed without compromising high standards for environmental
integrity. There are several standards and protocols already developed or currently under
development in the United St
ates that adhere to stringent quality and assure
environmental integrity.


b.

Quantitative Limits on the Use of Offsets


The WCI should not set arbitrary quantitative limits on the use of offsets to meet compliance
obligations. It is El Paso’s view that if an

emission reduction project can meet rigorous
environmental integrity standards, there is no reason to limit the use of such projects. The main
effect of percentage limits is to decrease the flexibility of the program, and to increase the overall
costs of

compliance. Without quantitative limits on the use of offsets, covered entities will invest
in the least expensive option


implementing ways to reduce emissions at their own facilities,
acquiring allowances through the cap
-
and
-
trade program, or through v
erifiable offsets. Allowing
covered entities appropriate flexibility in meeting compliance will benefit the U.S. economy,
since capital will be used in the most efficient way.


c.

Eligible offset project types



The
WCI

should develop an initial list of eli
gible offset projects. Offset eligibility guidelines
should be flexible, and both case
-
by
-
case and performance
-
based offset methodologies should be
used. Using these methodologies in the early years of a program prevents limiting offset scope to
only certa
in projects. Over time, standards could be established for case
-
by
-
case projects and
maintained through a system like the RBLC (RACT/BACT/LAER Clearinghouse), which



17

contains case
-
by
-
case information of the “best available” air pollution reduction technolog
ies.
Having such a database will also ensure uniform treatment of offsets across the WCI.


El Paso suggests the following categories of projects be considered eligible under a WCI linked
cap
-
and
-
trade offset program. Eligible projects should include those

projects listed as eligible
under RGGI, along with other projects such as those that:



Reduce methane emissions from landfills;



Reduce methane emissions from municipal wastewater;



Reduce methane emissions from coal mines;



Reduce sulfur hexafluoride emi
ssions from transformers; and



Projects that reduce fugitive and/or process methane emissions from
natural gas systems.


d.

Eligible offset project types from the Natural Gas Sector:



While methane emissions from the natural gas sector do not fit well withi
n a cap and trade
program, they can be a valuable source of low
-
cost offsets that would minimize compliance costs
during the early stages of a GHG reduction program. While it extremely difficult to accurately
measure emissions from thousands of fugitive em
ission sources in the natural gas sector, it is
relatively straightforward to measure the amount of methane fugitive emissions from
discrete
number of fugitive sources, especially when the monetary value of the offsets would create an
“additional” incentiv
e for such companies. Under such a program, the company would install
high quality measurement devices within the project boundary
33


Eligible offset projects
34

should include reductions at natural gas exploration & production
facilities and natural gas pip
eline and storage facilities that use techniques and technologies
outlined below or approved by the WCI. Eligible offsets will include those described by the
project owner in its protocol as beyond the typical or required emissions management practices
al
ready taking place before the offset project started.


At interstate pipelines, equipment where emissions detection, mitigation and/or reduction shall
occur can include, but is not limited to, the following: unit valves on blown down compressors,
blow dow
n valves on pressurized compressors, rod packings on pressurized compressors,
pressure relief valves, power gas vents for compressor unloaders, engine crankcase vents,
pipeline blowdowns, replacement of pipeline or equipment components. With respect to th
e
natural gas exploration and production sector, examples can include, but are not limited to, the
following: coal mine methane recovery, No vent or reduced vent drilling, completion or work
-
over procedures, solar
-
powered instrument/process air compressor

installations, low or no
-
vent
process equipment/controller substitutions, vapor recovery units, and gas lift devices to



33

Unlike the corporate or entity wide emissions inventory which would encompass thousands of components and miles of pipelines,

an offset project would be
limited to a discrete and relatively a small fraction of the company’s total invent
ory

34

El Paso comments to Karen Griffin on CPUC Recommendations for the Treatment of Natural Gas, July 26, 2007, Attachment “2” Pag
e 1.




18

reduce/eliminate the need for well
-
head venting. While there are several “protocols” and
methodologies approved by various registries a
nd entities, we recommend relying on existing
methods to determine baseline emission rates and to develop project baselines as a guide. More
specifically, the methods found in the Prevention of Significant Deterioration (PSD) regulations
can be used to de
termine baseline emission rates. El Paso has recommended a number of tools
for developing project baselines for the natural gas sector, which can be found in our comments
submitted to WCI
35
.


In fact, there is an approved methodology for quantification of
fugitive emission reductions
offsets from natural gas transmission facilities under the Clean Development Mechanism (CDM).
AM0023 developed and approved by the Clean Development Mechanism (CDM) Executive
Board on July 8, 2005 focuses on “Leak reduction fro
m natural gas pipeline compressor or gate
stations”. El Paso has developed and advocated the policy neutral” protocol document included
the same in our comments to the WCI
36

for case
-
by
-
case offset consideration from natural gas
transmission and storage fac
ilities as a valid offset category.


The El Paso proposal related to offset generation at natural gas transmission facilities ensures that
emission reductions are easily determined to be real and verifiable. El Paso strongly believes that,
in relation to
most other offset categories (including the five adopted by RGGI), our proposal is
superior and the WCI can be assured that offsets are real and verifiable. Superior measurement,
monitoring and verification technologies are being proposed based on establis
hed expertise
through our participation in EPA’s Natural Gas Star Program. Additionally, an err
-
on
-
the
-
side
-
of
-
caution, conservative bias in measuring reductions is being adopted to account for measurement
uncertainty.


We are sympathetic to the WCI’s conc
erns on potential administrative constraints and to adopting
a CDM
-
like, project
-
by
-
project evaluation of additionality. While we understand the need to
simplify the offset rules by using a performance
-
based standard approach, we believe this process
is ex
tremely time
-
consuming. It could, therefore, artificially limit the number of high
-
quality
offset projects, resulting in an arbitrary constraint on choices and access for facilities affected by
the cap
-
and
-
trade regulations. We acknowledge that WCI (or the

participating states) may have
staffing constraints (including potential technical limitations) to do full
-
fledged “audits” of
projects. But clear project definition, project documentation, an independent, third
-
party
verification regime covering projects

and claimed reductions



9.2

Offset Advisory Committee:


El Paso s
upport
s the creation of
an

offset technical
advisory committee

similar to the Advisory
Committee to The Climate Registry (TCR). Such an advisory committee, comprising of
governmental, no
n governmental, regulated sectors and other experienced offset developers could



35

El Paso WCI Comments, November 30, 2007, Appendix A http://www.westernclimateinitiative.org/ewebeditpro/items/O104F1
4463.pdf.

36

March 17, 2008




19

assist the WCI partners in developing a robust offset program by utilizing functional and/or
project development expertise of such entities
. In order to be equitable and balan
ced,
representation to such a committee should include (at a minimum) representatives from each
major sector covered by cap and trade program.


9.3

Allowances from other systems:


El Paso supports the WCI recommendation on the use of emission allowances f
rom other
mandatory regulatory programs.
El Paso believes that Regional Greenhouse Gas Initiative
(RGGI) credits and possibly allowances from the Midwestern Initiative should be allowed if these
programs are compatible with WCI. Again, this would help les
sen compliance costs in the states
participating in regional initiatives, and would assist in transition to an eventual national program.


10.
Reporting



El Paso has submitted concurrent comments to the WCI on the “Draft Essential Requirements of
Mandator
y Reporting for the Western Climate Initiative”
(Draft report)
issued by the WCI
Reporting sub
-
committee on July 23, 2008.
We support a
single, consistent national framework
for reporting emissions and recommend the WCI to merge its reporting program with

the US
EPA as it finalizes under the Congressional mandate in 2009.
Our comments are summarized
below


10.1
Definitions:


El Paso has provided additional definitional recommendations in our comments in response to the
Draft report cited above. The fina
l definitions from WCI should be consistent with definitions to
be finalized by the EPA under the mandatory reporting program to avoid potential compliance
conflicts for affected companies.


10.2

Applicability:


The reporting applicability should be consi
stent with CARB’s reporting program and should be
consistent with recommendations cited in Section 3 of these comments.


10.3

Timing:


El Paso proposes an annual reporting deadline of August 31 each year with appropriate quality
assurance completed by Dec
ember 31
st

of each year. We also strongly oppose the need for any
additional reporting, beyond annual reporting.
.








20

10.4

Report Content and Submittal:


El Paso supports WCI’s recommendation to use the TCR’s central repository for data storage as
well as offering flexibility to the affected sources to either file directly with the WCI partners or
through the TCR. However, for a company like El Paso that operates in multiple states, we urge
the WCI to ensure coordination with the EPA to streamline
reporting of emissions

and eventually
adopt a single reporting structure nationwide
. If TCR is employed by organizations operating in
multiple states, the reporting entity should not be required to be a member of the TCR and pay
membership fees.


10.5

Emi
ssions Quantification and Monitoring


a.

De minimis
requirements


El Paso suggests a 3% threshold
of the facility’s total CO
2

equivalent emissions as a de minimis
threshold
. We also recommend including a de
-
minimis activity list under the approved Title V
Pr
ograms in various states as qualified de
-
minimis activities that need no further computation or
accounting.



b.

Accuracy:



As stated in Section 1.c, the inclusion of emission sources in the gas sector with high degree of
emission uncertainties with other e
mission sources where the
CO
2

can be reliably measured (e.g.
power plants) or estimated will impact the integrity of the cap
-
and
-
trade program. Current efforts
in developing emissions accounting “protocols” do not improve the activity data or the emission

factors to overcome the uncertainty issues for use in a cap and trade program. The emission
factor and activity data improvement efforts will require significant resources and this task is best
done at a national level. Therefore, including the methane
related fugitive and process emissions
from the natural gas sector for reporting and in the cap and trade program, even under the second
phase of the program, is pre
-
mature at this time. We therefore urge the WCI to consider not
including fugitive emission
s in the reporting and the cap and trade program under WCI.


10.6

Verification and Quality Assurance

El Paso supports the concept
of multiple year verification cycles as outlined in CARB regulations
95102(a)(201)
with the first year of “full verification”

and less intensive verification activities in
the remaining years. However, we oppose the need for mandatory full verification on an annual
basis.




21



12

Compliance and Enforcement


12.1

Technical/compliance assistance:


El Paso supports WCI’s offer to provide
appropriate technical and other compliance assistance to
the program participants. Such technical assistance is much needed in the nascent years of a cap
and trade program. Experience from the European Union Emission Trading System (EU ETS)
37

indicate
s

th
at though the market fundamentals may indicate a higher valuation in the allowance
pricing, risk management systems at regulated entities may not be mature enough to comprehend
the compliance requirements. Since the WCI cap and trade program would be an
e
conomy
-
wide
program that is close to a billion tones and the fact that a vast majority of the regulated entities
simply lack emissions trading experience, we support and urge WCI to provide technical
assistance


12.2

Liability waiver for use of best available d
ata/protocol
:


As
indicated in previous El Paso comments and acknowledged by
many WCI partners,
emission
estimates from natural gas systems (production, processing, transport/storage and distribution)
have a high degree of
uncertainty
38
. The integrity of

a cap
-
and
-
trade program is dependent on
several factors including measurements of emissions with sufficient accuracy and consistency. El
Paso and other natural gas transmission companies estimate their fugitive emissions using factors
developed in the ear
ly
19
90s by the Gas Research Institute (GRI) and the USEPA

and may not
represent current operations
.
The
GRI/EPA study was conducted for the purpose of national
inventory development
,

but unfortunately, due to lack of better data, we and others continue to

use these factors.
Even the current efforts by the CCAR to establish an appropriate emissions
estimation protocol for the Transmission and Storage (T&S) sector does not account for emission
factor or activity data improvement or update.
The CCAR protocol

when developed would
merely be a compilation of existing emission factors and best factors. It is important for WCI
partners to acknowledge
the
fact that by including fugitive sources from the gas sector, one is
incorporating high degree of uncertainty i
n the cap and trade program. If the WCI continues to
insist to regulate fugitive emissions from the gas sector, the industry should be provided
appropriate liability waiver from retro
-
active compliance demonstration, if
in the future there are
improvement
s in the emission factors employed for the industry.

Such protection should be
incorporated into regulation and provides protection for companies who employed the WCI
approved estimation protocols against any historical variation in emissions reports or c
ompliance
demonstration via the cap and trade markets.




37

Mark C. Lewis and Isabelle Curien, Deutsche Bank, Global Markets Research, Market Update, August 4, 2008, at page 7

38

http://www.ipieca.org/activities/climate_change/downloads/workshops/jan_07/5%20George.pdf