Electric Utility Restructuring
Briefing Book
Congressional Research Service Library of Congress
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Air Quality Issues (RECLAIM)

James E. McCarthy and Larry B. Parker

 

A contributing factor in the California power crisis has been the Regional Clean Air Incentives Market (RECLAIM), a credit trading system for nitrogen oxide (NOx) emissions. RECLAIM was established in 1994 by California's South Coast Air Quality Management District. The system was intended to provide flexibility for companies in the South Coast (Los Angeles) area as controls on nitrogen oxides, a major contributor to smog formation, were tightened.

Under RECLAIM, stationary sources of pollution, including power plants, that emitted at least 4 tons of nitrogen oxides per year were given allowances based on their emissions during a base period. The program's goal was to lower NOx emissions 80% by 2003, by gradually cutting the number of allowances given to each emitter. Companies whose emissions exceed the number of allowances given to them must purchase additional allowances from other companies who have cut emissions below the number allowed (e.g., by installing stringent NOx controls or switching to cleaner fuels).

Because of record electricity demand in 2000, electric generators in the South Coast area generated more power than they did in the base period, and bought RECLAIM trading credits in unprecedented quantities. Their demand for credits was exacerbated by the fact that many have not installed the emission control equipment that could keep them from needing additional credits. As a result, according to the California Energy Commission, the price of credits rose from less than $1 per pound of NOx in January 2000 to nearly $50 per pound of NOx in August.

Because of the mechanics of the single price auction system of the California Independent System Operator (ISO) and California Power Exchange (PX) the utilities paying high prices for credits often set the price for all power purchased by the system. Under the system, the price of credits is rolled into utilities' bids for power. The highest priced winning bid at the power exchange then sets the price for all electricity generation sold. Thus, the cost of credits under the RECLAIM system faced by a few generators in Southern California increased the price set for all power trades. The California Energy Commission estimates that RECLAIM credits added $500 million to $2 billion to the cost of power in the summer of 2000, and as late as December, the credits continued to add millions of dollars per day to the cost of electricity.

To solve this problem, in December 2000 and January 2001, staff of the California Energy Commission and the South Coast Air Quality Management District made proposals that include: removing electricity generators from the RECLAIM system, perhaps establishing a fixed fee for utility NOx credits, or establishing a command and control program for NOx emissions. Requiring expedited installation of NOx control equipment was also recommended.

Additional Reading

For additional information on RECLAIM, see pp. 27-29 (31-33 .pdf) of the Commission's draft AB 970 Trends Report

RECLAIM proposal dated January 19, 2001

South Coast Air Quality Management District Web Site

Page last updated January 31, 2001.

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