Will a federal climate plan pre-empt states from regulating emissions? During today's OnPoint, Elisabeth Brinton, chief business and public affairs officer for the Sacramento Municipal Utility District, explains how a federal climate law will affect the city of Sacramento, Calif., where state and local emissions reduction measures have already been enacted. Brinton also gives her take on how derivatives regulation should be addressed in financial reform legislation.
Monica Trauzzi: Welcome to the show. I'm Monica Trauzzi. Joining me today is Elisabeth Brinton, chief business and public affairs officer for the Sacramento Municipal Utility District. Elisabeth, thanks for coming on the show.
Elisabeth Brinton: Thank you, Monica. It's a pleasure to be here.
Monica Trauzzi: Elisabeth, as the Senate debates how to proceed on the climate policy front, what are the key provisions from a utility perspective that you believe should be included in the final Senate bill?
Elisabeth Brinton: Well, first of all, SMUD, or the Sacramento Municipal Utility is part of public power, so we are customer owned. We are a nonprofit utility and so, for us, that is a key point in how we're looking at some of the issues. SMUD has been a leader in renewable energy for many, many years. Twenty-five years ago we were the first utility to establish a commercial scale utility solar, so a renewable energy standard or RES is something that we think is important and very doable and we're, frankly, a model of that in California.
Monica Trauzzi: On the RES front, is there any concern about how a federal mandate may impact the efforts that have already been made on the state level, if a federal mandate say is less than what's on the state level?
Elisabeth Brinton: Well, for us in California, first of all, there's certainly concern and caution and it's fairly important that we bring the entire United States together. One of the things that's important to consider in energy policy is that not all regions are the same, not all regions have the same access to certain types of renewables, for example be they wind or solar. So, we need to be thinking through to make sure that transmission options are available; there's flexibility and opportunity for different utilities with different models and access to different types of energy sources to come up with a realistic plan. So, in terms of not being the national to the state level, there needs to be harmonization and make sure that the goals are established at a reasonable level. If they establish a goal, make sure that the flexibility for the utilities to meet those goals remains.
Monica Trauzzi: On cap and trade specifically, how do you think the allocation of allowances should be handled, in particular for utilities?
Elisabeth Brinton: Well, again, from a public power perspective we want to make sure that we have flexibility for the reqs and it's important that we have the accountability to our customer ratepayers, so it's important for us to make sure that we have the ability to use the reqs for ourselves.
Monica Trauzzi: So, in terms of the climate law, emissions reductions, how would a federal law impact a city like Sacramento where steps have already been taken?
Elisabeth Brinton: Well, in Sacramento we are already, from the EPA and Cal EPA's perspective, we're already zoned that air quality is a very strong concern for us and so, as a result, we've already taken a tremendous amount of steps. As a utility we already have a board mandate to reduce our carbon emissions back to 1990 standards. So, for us, we're really ahead of the game. So, I think we can actually serve as a practical model for how other regions in the United States can move forward and balance and harmonize the environmental goals with the practical realities of running your business. And one of the things that's very important to us is to make sure we have the flexibility to serve our customer's need and not forget that, that there's reliability concerns. You have to balance reliability, affordability, as well as the environmental goals.
Monica Trauzzi: Well, and one of the big concerns about enacting some kind of climate policy is that energy prices are going to go up. So how do we balance that? How do we make sure that on the consumer level, you know, the consumers aren't feeling it too hard?
Elisabeth Brinton: That's a really, really important point, Monica, and, again, as public power, we have our customer ratepayers come directly to us. They come to our board members. We have seven elected board members and so we hear it. We get the customer calls and, as an executive of the utility, I have direct access to those customers, so I know it. So, one of the things we've learned is that customers really want a sense of rate stability is very important to them and so I know one of the issues we're going to talk about a little bit is derivatives and that ties into this. Volatility is really, really difficult for customers, whether they be residential homeowners or also large C&I, commercial and industrial, customers. So, part of the balance is making sure there's some rate stabilization over time, as well as, practically speaking, keeping rates as low as possible and that is part of our competitiveness, not only our higher national competitiveness, but also regional competitiveness.
Monica Trauzzi: All right, so let's talk about the derivatives regulation. One of the things you're in town talking about is the financial reform legislation ...
Elisabeth Brinton: That's correct.
Monica Trauzzi: That's being discussed on the Hill. So, what are you looking for on OTC derivatives regulation?
Elisabeth Brinton: We're looking for a special exemption for end-users. Now, utilities, we purchase and we use, it's hedging. We use the hedging to protect our customers against the price volatility. So, it's very important for us to have that special end-user exemption. There is no speculation on our part. This is purely to hedge to make sure that we're looking out for the best interest of our customers and it's important that the OTC derivatives that we use is only 1 percent of the overall derivative market. So it's very, very small. There's nothing that could derail or cause serious concern for the market as a whole. That's something that the banks often bring up, but, in fact, this is a very, very small and specialized part of the market.
Monica Trauzzi: So, without that what would the impact be on a utility?
Elisabeth Brinton: It would be dramatic. For example, what that means is we would have to place collateral, which translates into cash, and for us, for our size of utility, we have about a $1.5 billion budget and we estimate we would have to have about $250 to $300 million annually, which is a huge proportion of that budget of cash to be able to provide the collateral or margin for those hedges. So, what that translates in addition is we'd have to go out to the credit markets and borrow to have essentially a line of credit to cover that, which would translate into anywhere between $15 and $20 million a year in interest rate payments. So, you add all that in, that's going to have a direct customer rate impact. So, we're very, very concerned about that on two levels. The customers are going to be hit with volatility. We're going to have to translate that volatility back to them, as well as then the carrying costs of that cash. So it's not good.
Monica Trauzzi: Switching gears, you recently received a $127 million federal grant to implement smart grid technology. What are some of the key challenges that you still see in terms of smart grid and where the U.S. needs to grow on that front?
Elisabeth Brinton: Well, smart grid, first of all, is a tremendous opportunity, because, essentially, what it does is it adds a technology layer through software automation to the grid that, essentially, hasn't been modernized since the time of Edison. So, when you talk about smart grid what we really need to talk about in the United States is how it holistically lifts the opportunity for energy usage from the customer side all the way in the home, there's opportunities with new smart technology, smart meters, and new appliances that are going to come down the way. So, customers will be able to have choice, more energy information, for example yesterday's bill today. But then it extends all the way to the power supply through transmission and distribution. So, the key magic about smart grid and where it's leverageable is if you think about it as a whole living system. And so that's something that's often missed in the conversation. You talk about one component or the other because you have solar folks talking about solar and so forth. And so where the opportunity is to think about it as a whole system and then you'll be able to leverage the efficiency. So, for example, SMUD's utility perspective, if we can get 1 percent of efficiency on our grid through automation that translates into several million dollars of savings for our customer owners.
Monica Trauzzi: All right, we're going to end it right there. Thank you for coming on the show.
Elisabeth Brinton: Thank you.
Monica Trauzzi: And thanks for watching. We'll see you back here tomorrow.
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